Will California become America's first failed state?

http://www.guardian.co.uk/world/2009/oct/04/california-failing-state-debt

by sdave • 17 years ago

53 86 17 years ago

guardian.co.uk

http://www.guardian.co.uk/world/2009/oct/04/california-failing-state-debt

i dont live in US, i wonder how a place like california got into such mess.

jacquesm4• 17 years ago

A couple of days ago there was a statement here by someone claiming that California got 1/3 of the worlds venture capital, it looks like that could be spent better than on the 'next hot thing' on the web. Unbelievable, what a scene.

ryanwaggoner3• 17 years ago

1. VC do invest in a lot of things beyond "the next hot thing on the web", including hardware, cleantech, enterprise software, etc.

2. VCs have a responsibility to get returns for their investors, not fix the government's fiscal problems.

3. Those "next hot things" have at one time or another included companies like Google, Yahoo, Facebook, and others, which have together contributed billions of dollars and tens of thousands of jobs to the state of CA. Not bad for some stupid web 2.0 fad, huh?

jacquesm4• 17 years ago

As evidenced by the state described in the article...

No, it's not bad, but apparently the wealth is not spread in a way that precludes conditions the likes of which should not be seen in third world countries, let alone the first.

Of course these problems are not there for the VCs to fix, it's just that California was mentioned rather loudly as 'the place to be'.

For start-ups maybe.

jhancock7• 17 years ago

"VCs have a responsibility to get returns for their investors, not fix the government's fiscal problems."

I realize this isn't what you were getting at, but its a good place to make the remark. Its every American's responsibility to pay a certain amount of time and effort into ensuring government is run well. If your dance card is too full with making money and no time left over to watch over your government, it catches up with you. I'm not singling out VCs here. It is a general problem for an economy to be structured so most do not have time or inclination to pay attention to governance maintenance. There is a second problem which generally only applies to wealthy and/or well organized groups which is the inclination to "corrupt" governance in their favor. Both these problems have reached critical effect.

patio113• 17 years ago

i wonder how a place like california got into such mess.

They were ground zero for a pair of US bubbles. This caused the state's revenues to skyrocket. Believing revenues would always skyrocket, groups which have essentially captured the state and municipality budgeting processes voted themselves large increases in benefits. It is politically impossible to reduce those benefits once enacted, yet they automatically snowball in costs every year. Its like the miracle of compound interest, except in reverse, and with the full principal being due every year.

The bubbles have burst and California no longer sees the potential for staggering revenue growth every year, but will see double-digit increases in benefits outlays for the politically powerful groups.

Bonus points: every time California has a short-term lack of funds they negotiate with their beneficiary groups to trade a lack of increase this year (note: not a cut, just less increase than they would have otherwise gotten) in favor of a new entitlement due in N years, whose NPV is astoundingly higher than the savings due to the lack-of-increase.

callmeed3• 17 years ago

"groups which have essentially captured the state and municipality budgeting processes voted themselves large increases in benefits ..."

By "groups", you mean "politicians, government employees, and unions" right?

- California teachers and school employees are the highest paid in the nation. 35% above the national average.

- State employees make about 35% more than private-sector employees

- An enormous pension problem for government employees. A public-safety worker can retire at age 55 with 90% of his/her salary. The result: $65B in upcoming, unfunded pension liability. My father-in-law is a retired probation officer. He does consulting for his county and pulls a pension check–basically working part-time and pulling 1.5 salaries.

- The state spends 70% more (per capita) than the national average on social services, primarily because of it's welfare programs.

Funny story: I worked at a CA community college for a few years while still in college. Just special programming projects and IT stuff. When I quit to pursue my first startup, I got a letter letting me know I had $2,000 in a PERS retirement account. As much as I enjoyed cashing it out for our startup, it just shows how reckless CA is with spending and obligations to these groups.

Don't think all this is because of a lack of income either. State personal income tax is really high. Part of the reason we left 2 years ago.

cunninglinguist3• 17 years ago

Absolutely on the money. These are the fruits of rosy-eyed welfare policy: rampant poverty, fiscal collapse, the poor get poorer and the middle class? What middle class?

thirdusername• 17 years ago

- State employees make about 35% more than private-sector employees

I'd like to know how they came up with those numbers, care to reference?

TomOfTTB2• 17 years ago

Agreed. I run the IT dept. for an agency that provides mental health services to abused and neglected children. The program qualifies for "cost reimbursement". That means every supply given to our Mental Health program (pencils, computers, etc...) is billed right back to the state who then pays us the exact amount back. All you have to do is prove the supply went to Mental Health staff.

A couple years ago our Therapists complained that all the other agencies had LCD monitors and they didn't (this was back when LCDs were still relatively expensive). I tried to stop the purchase but the truth was they were right, the state would pay no matter what and every other agency like ours HAD bought their staff new LCD monitors.

In the end we spent about $15,000 of state money replacing monitors and ended up throwing out CRT monitors that were only 1 or 2 years old (and which the state had also paid for). Worse there are about 8,000 agencies like ours in California and they all did the same thing.

ryanwaggoner3• 17 years ago

Is there some particular reason you didn't put the URL in the URL field?

For anyone else annoyed:

http://www.guardian.co.uk/world/2009/oct/04/california-faili...

dkokelley• 17 years ago

I resubmitted in the correct format: http://news.ycombinator.com/item?id=859776

Should anybody prefer to use it.

cpach• 17 years ago

It's better to let the HN admins take care of such matters. They have fixed the original submission now.

sdave• 17 years ago

pardon for the inconvenience caused due to copy-pasting the link.

bbg• 17 years ago

The Economist in July of this year made an interesting contrast between the fiscal policies of California and Texas.

http://www.economist.com/displayStory.cfm?story_id=13990207

ahlatimer3• 17 years ago

I think one of the biggest strengths for fiscal security the Texas government has to offer is our inability to take on debt. By decree of the Texas state constitution, the budget must be balanced each and every year. That's something that article misses out on.

Of course, there are some really stupid things that Texas does in relation to its spending. Namely, budgets are set two years in advance. It might have made sense when Texas was first formed, but it hardly makes sense now.

joe_the_user• 17 years ago

Hmm,

Remember, California has the size and diversity of many medium-sized nations... so generalizations often don't work.

The scene at the forum wasn't really connected to the recession or California but US health care and US urban poor in general.

I'm surprised how little I notice the recession, much less the "collapse" of California. Of course, I'm in the Bay Area and I think that LA and especially the central valley were harder hit. But that is how the US generally has been economically - strong urban area but with hinter-lands that are poorer than one would imagine.

TomOfTTB2• 17 years ago

Actually Los Angeles County's unemployment rate was only .6 percent higher than Santa Clara County (12.6% vs 12%). San Francisco does a little better at 10.1% but it's still above the national average (see here: http://www.google.com/publicdata?ds=usunemployment&met=u...)

In reality California's unemployment rate gets dragged up by the smaller counties in the extreme north and south. For example, Imperial County (which borders Mexico) has a 28.7% unemployment rate while Shasta County (about 40 miles or so south of Oregon) has a 15.2%

cunninglinguist3• 17 years ago

The problem that this article doesn't point out and nobody wants to talk about: California is burdened with the largest reservoir of undocumented/illegal workers in the country. Until these people are brought into the system, until we see some true immigration reform (either by naturalizing every worker or, conversely, by getting serious about border policy) the state is in an untenable position. Things will get worse before they get better.

California and US immigration policy are a mammoth case of "walk on left side, okay; walk on right side, okay; walk in middle - squish! just like grape" which you Karate Kid fans might remember...

kingkongrevenge9• 17 years ago

What about deporting all the illegals? That would be far the most fiscally effective solution.

foulmouthboy• 17 years ago

Because the cost of doing that is free?

cunninglinguist3• 17 years ago

Is it that simple? I can't tell if your comment is tongue in cheek. But if you consider the hundreds of billions of dollars it would take to locate, process, and deport every illegal, if you consider increased labor costs for local businesses many of whom would go under without a plentiful supply of cheap labor, and if you consider that America has never really been about "deporting people" (quite the opposite) it seems like simply deporting every illegal is a horrible solution.

Equally horrible is to have to provide ever-increasing social and welfare benefits to millions upon millions of undocumented, non-tax-paying workers who are now also unemployed. There is no quick fix here. But if you were to naturalize those workers, give them SSNs and DLs, encourage them to partake of the "American dream" or what's left of it...maybe in ten or twenty years you'd find things had started to improve.

I don't really know. If this were a game of chess, I'd simply resign.

jhancock7• 17 years ago

I don't have an answer, but I doubt you can prove its the most fiscally effective solution.

I'm sure there's been studies on the costs of doing this. These are just off the top of my head.

1 - finding and sending them home. This will be huge. There're not all from Mexico, not always an easy/cheap trip. Cost of finding them will put cost pressures on local law enforcement. Cost to detainment while you send them home. Some you won't be able to prove to the receiving country that actually is their home which increases detainment time, sometimes indefinitely.

2 - lost low cost labor would increase business costs resulting in inflation and business failures. This may also be huge. Its an unknown economic shift.

alexgartrell• 17 years ago

And send every single California farm into bankruptcy?

"Those damn illegals" are pretty critical, in real life.

KirinDave• 17 years ago

Yeah, I'm sure that's an action that would basically pay for itself.</sarcasm>

I can think of no greater economic nightmare than a nice racially motivated witch-hunt against the states most-exploited worker class.

michaelkeenan• 17 years ago

How do illegal workers contribute to the problem? I understand that they don't pay income tax, but at their typically low incomes, I'd expect that they wouldn't be paying much tax anyway, and would more likely qualify for the Earned Income Tax Credit (i.e. negative income tax) if they were legal.

I'm reminded of the difference between the view of economists on the economic non-problem of immigrants as described by Bryan Caplan: "Economists are vastly more optimistic about its economic effects than the general public. The Survey of Americans and Economists on the Economy asks respondents to say whether “too many immigrants” is a major, minor, or non-reason why the economy is not doing better than it is. 47% of non-economists think it is a major reason; 80% of economists think it is not a reason at all."

http://www.cato-unbound.org/2006/11/06/bryan-caplan/the-myth...

TheElder• 17 years ago

One idea: Illegal immigrants contribute to the problem by creating social conditions that are unfavorable for optimal living conditions, causing the people with money (big taxpayers), to move, leaving behind cities with an unskilled workforce and a high reproduction rate. Anybody capable of moving away from areas and cities with huge illegal immigration populations will move. Once they are gone and the businesses move with them, what you have left is an area that consumes taxes at a high rate and contributes very little back.

Is it racism that causes people to move? It could be, but there are valid reasons to flee such areas. There are huge gang problems and schools start to under perform. Hispanic students are some of the worst performing students in the country, often not even finishing high school. Now you have unskilled people competing for unskilled jobs, which few exist anymore.

jacquesm4• 17 years ago

Without those illegal immigrants / undocumented workers the economy would collapse completely.

chris123• 17 years ago

It's not just California, it's the whole country that's in a mess. How did it get there? In a word, greed. In a few more words, people failing to understand, tolerate, care for, and stand up for each other, especially people different from them. "Me, me, me" does not work. "We" works.

chrischen2• 17 years ago

Well America is a very individualistic society. Unless we have a massive cultural overhaul, most people will keep thinking in terms of "me."

trafficlight• 17 years ago

Of course we will. Everyone is afraid of being labeled a socialist. Or a communist or a facist since they are all used interchangably now.

chrischen2• 17 years ago

The very concept of the "American Dream" is individualistic. Individualism is ingrained in our culture. We are all taught to think for ourselves, and thinking for ourselves usually winds up being thinking about ourselves for most people.

miked2• 17 years ago

In a word, greed. In a few more words, people failing to understand, tolerate, care for, and stand up for each other, especially people different from them.

Greed wasn't just invented. Ditto for the rest. A scientific explanation requires that the dependent variable Y be a function of the independent variable X, if X is claimed to be causative.

Another thing I dislike about statements like this is that the speaker always comes out smelling like a rose. That may not have been your intention, but there it is.

jacoblyles• 17 years ago

That's an incredibly simplistic worldview that is expressed here.

yummyfajitas4• 17 years ago

"Me me me" made us one of the richest countries in the world. In a bad recession, our unemployment is about as bad as most of the "we" countries. We are still far richer.

The fact that we have booms and busts (and are currently in a bust) is not evidence that our system doesn't work.

ricaurte• 17 years ago

If California wasn't subsidizing the South, then they wouldn't have the fiscal problems they currently have. In 2005 alone, Californians paid $47 billion more to the Federal Government than they received in spending.

Considering California's annual budget is $100 billion, Californians could lower their taxes by almost [Edit] 40% and avoid their budget problems if they stopped subsidizing the red states.

- http://www.taxfoundation.org/research/show/22685.html - http://www.bloomberg.com/apps/news?pid=20601087&sid=a5_S...

[Edit] A link to CA's budget: http://www.ebudget.ca.gov/pdf/Enacted/BudgetSummary/SummaryC...

jhancock7• 17 years ago

First off, the South wasn't always "red" states and you would do well to not permanently brand an entire state as such. Georgia's current governor is the first Republican to hold the spot in 130 years!!

Now you point out this $47B overcharge. And what happens to the great California economy once the U.S. is developing economic cancers all over the rest of the country due to lack of funds? Who's left to buy the iPods? Like it or not, Cali is part of the U.S. All for one.

Seriously, if your looking for root problems, not fanning the flames of bubble economies is a good start. I've never heard of a bubble that ended well. Paying attention to state governance to not allow the spending to get this out of hand would help as well.

natrius• 17 years ago

California (and New York, Texas, Illinois, Florida, etc) would be fine without subsidizing other states. In fact, they would probably be better off. When places become difficult to live in, people tend to move to better places. We spend money trying to make unproductive places viable places to live when that money would be used more efficiently in states with better infrastructure, both human and physical. The more people who move away from subsidized places, the more money they will make on average, and the more iPods will be sold.

Humans agglomerate because it makes us more productive. By subsidizing dying towns in the middle of nowhere (and Michigan), we're paying people to be less productive. I don't care where people choose to live, but I shouldn't have to pay for their choices.

Even if it were in the self-interest of productive places to subsidize non-productive places, our current method of doing so isn't the best approach. There are greater gains in productivity to be had for less money in Mexico, which would create wealthier neighbors for us to sell things to. This is simply another case of the tendency of majorities (which in the US may only be electoral, not real majorities) in democracies to take what they can from the minorities.

yummyfajitas4• 17 years ago

Those numbers would only be a fair comparison if they exclude military spending and entitlements. A air force base in Kansas or a submarine purchased from Misisippi is (in principle) defending the entire US.

Also, federal entitlements follow the person, not the state, and can't be counted against states. Simple example: a person works in CA (paying taxes) and then retires someplace cheaper like AZ (receiving taxes).

Maybe CA does subsidize the south. But the tax foundation numbers don't prove much, one way or the other.

billswift• 17 years ago

I don't have statistics, but in "Cities and the Wealth of Nations" Jane Jacobs argued that what really happens in modern times is that cities end up subsidizing rural areas. So more urbanized areas would "subsidize" those less so.

easp• 17 years ago

You don't think that military bases and big federal contracts aren't just another form of welfare subsidized by blue states like California?

xcombinator2• 17 years ago

I live in Spain, like California:

1) We are frontier with way less developed countries. Africa-Europe frontier.

2)We have good climate all over the year.

3)We got in debt for buying houses. Tens of years of loan debt were given to the government in the form of taxes. E.g, you got 35 year loan and paid right now 16% taxes.

4) The government got used to spending the money, thinking ill will last forever.

5) People stopped paying loans. They had the same money that before, taxes grew because debt grew. Today we have millions of unsold houses.

6) Government spends way more that come in. They don't want to stop spending so they, as an state, go in debt too.

7) Government is in trouble. We are near 20% unemployment rate, gov is constantly trying to lower the official rate making statistical tricks, like not considering unemployed those that don't work but go to a employment class.

8)To be continued...

yxhuvud• 17 years ago

Given that Spain don't really have the ability to print money any more due to being a member of the Euro, what do you think will happen?

borism• 17 years ago

Spain's public debt is not so bad compared to it's other neighbors - France, Portugal and Morocco all have almost twice as much. Spain's problem is mainly with the private debt...

Anyway, as you mentioned Eurozone, PIGS countries (Portugal-Ireland-Greece-Spain) are obviously a major burden with their problems.

But what will happen will depend on what actions will be taken. Personally I'm quite pessimistic about Europe.

Here's a detailed analysis of the situation from Roubini Global Economics Monitor http://www.rgemonitor.com/euro-monitor/255424/do_brics_and_g...

adnam2• 17 years ago

Property taxes in Spain vary but are typically in the range of 5% to 8% depending on where you buy the property and the ages of the buyer; way less than 16% which is the VAT ('IVA') rate.

xcombinator2• 17 years ago

Of course, you pay property taxes, but with the money you pay you are paying the VAT other people pay(the person who sells you the house needs to, and all the chain).

kevbin• 17 years ago

The article overstates CA's response to its problems. The slashing and "vast numbers" aren't enough to right the ship and are pretty minimal compared to private industry, or even other state governments. The response of state employees and their unions to furloughs (walkouts, infighting, demands for still higher taxes) demonstrate seriousness hasn't set in.

Booms and busts define the state, long before the housing or internet bubbles, there was the gold rush, the oil boom, the space race, the PC revolution, you name it. There's always another boom to cover the last bust—this time, too. That boom and bust mentality extends to radical political solutions that become problematic in themselves, like the initiative process, super-majority rules, and prop. 13. The state pretty much is the guy described in the Lisp thread: http://news.ycombinator.com/item?id=859669

Maybe it's in our interest to be the world's hypomanic dreamscape? If so, the feds and everyone else can bail us out, like they do the rest of the nation's problem children (banks, farmers, automakers, savings and loans, tire makers, steel producers, railroads…), leave us to our booms and busts, enjoy the gravy when times are good and let us live in their basement strumming our guitar when we screw the pooch.

But, Uncle Sam's not much better off. He's just running on a slower pace. Long enough in his basement and he'll start to see how alike we really are—right around the time he gets foreclosed on. Our federal system has a seriously great architectural basis, but it's an 18th and 19th century design burdened with two centuries of gnarly patches and tweaks hacked together in two-year bursts by groups of 535 glad-handers and administered by a nameless, faceless, unrepresentative bureaucracy. As the nation scaled-up, the exquisite balance of republic and democracy struck by the founders turned into an opaque, incomprehensible, unfair, inefficient, ineffective cancer. Some major refactoring needs to be done. CA, having the same issues, will serve as a proving-ground for reforming the whole country. If it doesn't work out, well there's always another boom after the bust.

zoba• 17 years ago

Do the British use the word "hiring" instead of renting?

"The people are poor, many of them out of work, often hiring a bunch of DVDs as a cheap way of passing the time."

dgbeale• 17 years ago

Yes

korch• 17 years ago

As a transplant to California for 2 years now, grimly apocalyptic articles like this make me question staying. Thanks kevbin for framing California's Boom & Bust problem as actually defining the state through history. Perhaps being able to structurally and culturally handle endless Boom & Bust cycles make California a stronger state! You've got to love counter-intuition...

Scott_MacGregor• 17 years ago

California will ultimately pull out of this situation. The question is how long will it take, and how much pain will people have to endure before things get better.

As Entrepreneurs we hold part of the key to better times through the development of our businesses. The other side of the equation is for the most part out of our hands. Things such as the state passing a worldwide gross receipts tax and other similar actions that in the past have served to cool businesses interest in the state must bear some of the blame for this current problem.

I sincerely hope that this problem is short lived, and that Governor Schwarzenegger and the California legislature solve this problem ASAP for the benefit of all of us.

Will California become America's first failed state?

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