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California poses greater debt risk than Greece

by Mytheos Holt, published

Watching California’s swift descent into fiscal insolvency and the seeming inability of its dominant political class to accept the measures necessary to reverse it, one can easily feel a mixture of despairing frustration and awe. On the one hand, despairing frustration seems the only logical response to an insoluble budget crisis, but on the other, one can only react to Sacramento’s audacious decisions to ignore reality with something approaching awe.

This latter reaction may be close to that of the Persian messenger in the recent blockbuster 300, who gasped that his interlocutor’s behavior was blasphemy and madness, only to be informed in shouting tones by his action star interlocutor that “This is Sparta” before being kicked down into a pit. And if that comparison seems tangential, consider this – like the messenger, California’s people are themselves being kicked into a bottomless pit by an action star masquerading as a leader who considers all attempts at reason to be irrelevant. However, one thing is certain – thanks to recent statements by the head of JP Morgan Chase, California is now in a fiscally worse place than Sparta, or any other part of the debt-ridden mess that is contemporary Greece.

A recent report by the UK Telegraph has the details. According to the telegraph, Jamie Dimon, Chairman of JP Morgan Chase, warned a gathering of financiers that “’there could be contagion’ if a state the size of California, the biggest of the United States, had problems making debt repayments,” whereas “Greece itself would not be an issue for this company, nor would any other country.” The main problem, according to Dimon, is California’s massive debt, which Governor Schwarzenegger and other officials have only recently begun to take emergency steps to reduce, previously relying on comically insufficient methods such as issuing IOUs. This latter tactics hit truly alarming heights last summer, when Governor Schwarzenegger was forced to issue a staggering $3.3 billion in promised payments.

Similarly gimmicky moves have leaked their way into the present proposed remedies as well – for instance, the introduction of prolonged furloughs. As my fellow contributor Alan Markow insightfully points out in a recent article, however, furloughs are not only substantial disincentives for employees to continue working at full capacity, but also a less effective means of budget reduction than layoffs. One can raise the argument that layoffs are an especially cruel lash to inflict on people during a recession, but unfortunately, at times like this, the relative cruelty of a policy is at best a secondary concern. Moreover, mass layoffs would be a sobering reminder to the state’s government employees that they too are subject to the laws of market economics.

More fundamentally flawed, however, is Governor Schwarzenegger’s commitment to the notion that the federal government can save California’s people from themselves. In the first place, it should be noted that for every ounce of Federal aid the state receives, there are ten prospects for abusive Federal commands. Moreover, at the point where dysfunctional governments and bailouts have both become only slightly more popular than mandatory amputations with the American people, the prospect of the Federal government extending bailout money to a failing State is quite simply bleak.

However, it is now all too clear that simmering in the abyss of wishful thinking will be the death of the state, for the instant California sinks below the fiscal safety of foreign economic sinkholes is the moment when any chance of recovery becomes progressively further and further reduced. Governor Schwarzenegger’s slash and burn tactics with the current budget are to be commended, but they are a tiny step when a giant leap is needed – one only hopes the Governor will have the courage to take precisely that leap, rather than kicking the aspirations of his people into more bottomless pits.

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