California: A Budget Agreement That Breaks The State

The politicians who run California have come to a budget agreement that may take care of most of the state budget deficit, but it will drive California much deeper into recession.

To close a $26 billion gap, the state will, among other things, cut spending $15.6 billion. The damage that the plan will do to local economies and job creation is hard to imagine because it is so significant. Funds for public schools will be slashed. The state will borrow money from municipalities which will cut into their ability to provide new infrastructure and basic services.

The reduction in expenditures by the state was absolutely necessary to keep California’s bonds from being cut to junk status, making it nearly impossible to raise money, and to keep the state from becoming insolvent. It had already begun to issue IOUs for some obligations and this paper was not of much value to vendors who had to make payrolls.

State unemployment in California is well above 10%, one of the highest levels in the country. The state’s economic production makes up an outsized portion of America’s GDP and the total value of the real estate in California affects the national inventory of office space and homes for sale. The budget cuts will put more Californians out of work, which will almost certainly further erode state employment and, by extension, national jobless numbers.

The battle over the California deficit has been brutal and that part of the saga may be coming to an end. The pain that the settlement will cause the state’s citizens and the national economy is just beginning.

Douglas A. McIntyre