Free Markets, Free People

Treasury

U.S. Spurns Aid To California. Really?

In one of those “make sure you read the whole article” stories in the Washington Post, it begins like this:

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

If you read no further than that, you’d probably think, “thank goodness, a modicum of sanity has returned to the federal government”. It is California’s mess and California, along with the other states, need to learn a hard but necessary fiscal lesson here.

But, while perfectly correct in your assessment, you’d be wrong to think that the present rejection is final. Buried a few paragraphs down is this:

These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.

I’m sure he or she didn’t. This is another Geithner plan based in the premise that California is “too big to fail” – the 8th biggest economy in the world and its failure would slow down the economic recovery of the US.

Given that inclination on the part of Geithner, it would appear that nothing has been learned from the Chrysler and GM bailouts, failure and eventual bankruptcies. Granted, California’s “failure” would be quite a bit larger than those two, but haven’t we yet learned that propping up a unsustainable business or government model just doesn’t work?

While it may be painful for both California and the US, nothing changes in California unless massive cuts and changes are made in that government. And, as has been evident to even the most tuned out of constituents, the California government model has been unsustainable for over a decade.

Naturally, California wants to characterize their plight in the way that will appeal the most to the emotions:

“After June 15th, every day of inaction jeopardizes our state’s solvency and our ability to pay schools and teachers and to keep hospitals and ERs open,” Gov. Arnold Schwarzenegger (R) said Friday.

But the hard fact remains that the solvency of all those institutions are in jeopardy with or without a bailout. We’re simply talking about how long we want to extend the problem not how to solve it. Solutions mean massive cuts in government spending and resultant reductions in government services. Or said another way, California is finally going to have to live within its means or fail.

That’s not a condition the rest of the taxpayers in this country brought about, and it certainly isn’t one they should be on the hook to “bailout”. And that goes for every other state in that condition as well (see the article and its mention of how Treasury is thinking about doing something with auto suppliers in Michigan – is that the job of Treasury).

~McQ