Can the U.S. Afford to Let California Fail?

Over at Time, Kevin O’Leary asks, “Can the U.S. Afford to Let California Fail?,”

States across the nation are suffering the effects of lost tax revenue in the worst economic downturn since the Great Depression. California’s woes are similar and different in kind, played out on a grand scale in a state that boasts the world’s eighth largest economy and a Hollywood star in the lead role. After voters rejected a slew of convoluted budget-balancing measures, the governor has proposed cuts to programs that would make California more like a struggling Third World state than 21st century America: welfare subsistence benefits would end, 1 million poor children would lose health care, college aid for the state’s best and brightest would be phased out, nonviolent prisoners would be released, hundreds of state parks would be shuttered, and thousands of teachers would lose their jobs.

…As California faces a $25 billion budget shortfall, which it must resolve by July 1, the state is on the brink of financial disaster, and ripples from its fiscal collapse could adversely affect both the nation’s economic rebound and, potentially, the Federal Government’s credit status. The Republican governor and GOP legislators say they will not raise taxes, especially after Schwarzenegger and six Republican legislators joined a budget deal with Democrats in February that combined deep cuts and $12.8 billion in higher taxes. Now the budget shortfall has spiked again as state tax receipts have dropped 27% from a year ago. Democrats and advocates for programs under the knife will fight the cuts, but neither money nor time are on their side.

In addition to its multibillion-dollar deficit, California faces a severe cash-flow crisis and state controller John Chiang warns that the state could run out of money in July. California has the worst credit rating among the 50 states, so its leaders have pressed the Obama Administration and Congress to act as a co-signer on the state’s borrowing. As with AIG, California officials argued, the state is too big to fail. “A fiscal meltdown by California … would surely destabilize the U.S., if not worldwide financial markets,” state treasurer Bill Lockyer wrote U.S. Treasury Secretary Timothy Geithner on May 13. Yet experts say such action by the Federal Government, while not a bailout, could possibly endanger the nation’s AAA credit rating. Without short-term assistance, California could plunge deeper into chaos and become a drag on the nation’s economic recovery.

Here’s the reality of the situation that this country is in: we are flat broke. Not only can we not pay our day-to-day bills, nobody seems to have the slightest idea how we’re going to pay the debt we already owe. Meanwhile, Barack Obama wants to dramatically ramp up the amount we’re already spending for socialized medicine.

So, we couldn’t afford TARP. We couldn’t afford the stimulus. We couldn’t afford to bail out GM and Chrysler. We can’t afford to be giving billions more to the IMF. We can’t afford socialized medicine — and we can’t afford to bail out California.

Now, don’t get me wrong: I feel sorry for the people of California. Despite the fact that they elected a governor who made being fiscally responsible the centerpiece of his entire campaign, he turned out to be a run-of-the mill liberal and wasted even more money than his predecessor. Now, the state has a 25 billion dollar deficit, a degraded credit rating, and successful people are fleeing the state to get away from the lousy economy and the irresponsibility of their government.

Unfortunately, the reality is that this isn’t bad luck: California has done this to itself. Its politicians have taxed and regulated businesses into the ground. Through irresponsible housing policies, they’ve created insane real estate prices in cities like San Francisco. They’ve strangled energy companies to the point where they’ve had rolling blackouts in their state. Now, with the economy in the toilet, Californians are paying the price for years of bad decisions on spending issues.

Not only would passing California’s deficit on to the rest of America through a bailout be morally wrong, it would encourage more bad behavior. If California isn’t forced to change by the pain of this fiscal crisis, the behavior that created this disaster will continue. Moreover, if this were done for California, what would the rationale be for refusing to help other states that are running a deficit? What about the next time there is an economic crunch? Would everyone expect the federal government to clean up the mess again? At some point, people and governments have to be held responsible for their own actions and bad decisions.

While no one should want to see the people of California suffering, they need to take their medicine so that hopefully they won’t keep engaging in the same behavior that got them to this point.

PS: I’d say the same thing about EVERY state, every bank, and every company. It may be painful for them to fail, but over the long run, it’s more painful for the economy to protect them from the consequences of their mistakes.

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