As California goes, so goes the nation

by digby

Here’s a blast from the past that might put some of this in perspective. California, something like the 8th largest economy in the world, has been screwed a lot longer than the federal government. It still is. But the least of its problems is its lousy credit rating:

California Is Not Greece

by: Robert Cruickshank

Fri Mar 12, 2010 at 11:48:12 AM PST

Carly Fiorina thinks California should file bankruptcy (Earth to Carly: the state can’t). And many right-wingers have argued that California has to reduce its level of spending, adopting austerity budgets to avoid the kind of financial problems faced by Greece. Along with other Mediterranean countries, Greece has been pushed to adopt austerity budgets that threaten a European-wide severe recession in order to satisfy bond markets that worry about the level of debt to GDP.California faces no such problem. That was proved once again yesterday when a sale of California bonds went extremely well – Treasurer Bill Lockyer was able to sell $500 million more in bonds than originally anticipated, and at lower interest rates:

The tax-free general-obligation bonds, which will fund voter-approved infrastructure projects, attracted orders totaling $1.38 billion from individual investors Tuesday and Wednesday.With just $620 million of the original $2-billion deal left, the state took in $3.3 billion in orders from institutional investors Thursday. To fill more of those orders, Treasurer Bill Lockyer raised the deal to $2.5 billion.Despite its weak credit rating and the ongoing struggle to plug a $20-billion budget gap, California benefited from investors’ still-voracious hunger for fixed-income securities. The state sold bonds ranging in maturity from one year to 30 years.Strong demand allowed the state to slightly reduce yields on some of the bonds from preliminary estimates. Final tax-free yields ranged from 1.17% on the two-year bond to 5.65% on the 30-year.

This reveals a couple of things. First, it’s likely that the rating agencies are playing games with the state’s credit rating. California must by law devote its tax revenues to repaying bondholders, with only education having a higher priority. Second, it shows that California can sell its debt on the markets right now without the need to resort to further austerity…

That’s not to say California is out of the woods. Far from it. Whereas nations like Spain, Portugal, and Greece are just now adopting austerity budgets (at the self-defeating insistence of Germany, which deludes itself into thinking this will do anything other than depress demand for German exports), California has had austerity budgeting since the summer of 2007. As a result, we have a 12.5% unemployment rate and no prospect of significant economic recovery anytime soon.

In fact, some of the only job creation comes from bond debt like this, which funds infrastructure projects. Some Republicans want to suspend sales of these bonds, including the $9 billion high speed rail bond, but doing so would only cost us more jobs and set back our efforts at economic recovery.There are legitimate concerns about the portion of the budget that goes to debt service. But the best way to address that is to increase the amount of revenue the state takes in. California has an enormous GDP and large fortunes that go largely untaxed. Capturing more of that money would help service the debt load while at the same time expanding government services, which is necessary for economic recovery.

California’s been living in austerity opposite world for quite some time. The results are devastating. But the downgrading of its debt was hardly the biggest problem it’s faced — its inability to rationally deal with an economic down turn is a far bigger challenge. The lousy credit rating is a blip in that larger catastrophe.

Update: This post by Dean Baker is essential to understanding this S&P nonsense.