No Bailout, No Thanks

by dday

I have about 30 posts I want to write about the developments of the past week and a half here in California, but I want to start by addressing the confusion over that Washington Post article stating that the Obama Administration spurned a request for aid for the state. Outside of Zoe Lofgren, a Congresswoman, nobody is named in this request, nor is the request defined. It refers late in the article to one letter from Bill Lockyer to Tim Geithner that appears to reference federal loan guarantees, which is, again, not a bailout. And the Governor has tried to rule out borrowing to deal with the cash crisis anyway. So I question whether anyone has discussed any kind of dollar transfer from the federal government to California at all. I think this article hangs on an extremely thin reed.

Now, I do think the government should consider offering loan guarantees, to stop the gouging of California going on from Wall Street. But unlike Digby, I do not think that California progressives should WANT a “bailout” in the more traditional sense. It sounds like it would be a nice and tidy solution, and maybe the strings attached could make it easier for the state to get its business done. But that’s very speculative, and so we have to consider who such a solution would actually bail out. Clearly, it would bail out the failed Democratic legislature for refusing to lead and take a long-term view on reforming the state governmental process.

First of all, we know that, with revenues dropping like a rock and and the housing bust continuing without end, in six months the budget projections will fall short again. They have fallen short for about 15 straight months. Which means what, another bailout? That simply isn’t a long-term, sustainable solution. Some may say that it would keep the poor from dying, but it seems to me it would only delay such an outcome. Heck, we know that California last issued IOUs during a budget crisis in 1992, during a MILD recession. The structure of state finances, with Prop. 13, the absurd 2/3 requirement for raising taxes, and all the rest, simply means that we will lurch from crisis to crisis forever without a permanent fix.

We have solutions and we know what they are; there’s really no mystery, other than the fact that legislative Democrats refuse to dare speak their name. A federal band-aid would delay those solutions once again, as they have been delayed for 30 years. We simply will never fix this if we keep deferring the California dream and persuading others to mop up the mess caused by failed leadership.

More generally, if you want to bail out states that didn’t cause the recession and have to go about punishing their citizens for it, argue for a permanent federal fiscal stabilization fund that could be tapped if deficits hit a certain percentage and economic contraction hits a certain level. We have counter-cyclical cuts in the states because they can’t print their own money, and as a result, we actually harm the possibility for a quick economic recovery by cutting public spending at the time it ought to be raised. We need to permanently end the paradox of state budget cuts during an economic downturn, and so if people want the federal government to help, it should be mechanized and durable, and enhance economic recovery by kicking in when recovery is needed.

This may be a contrarian view, but I think a bailout would delay the changes desperately needed, nor would it even help the most vulnerable in society over the long-term or even the short-term. We need to deal with the problem at hand.

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