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Greece or California: Who'd you rather be?

Opinion

California's economic woes can do more damage to America's recovery than Greece's can do to Europe's. Yet which of the two may be getting a bailout?

February 18, 2010|By Harold Meyerson

If I were the governor of California, cursed with an insoluble budget crisis, and if I had asked the federal government for help and been rebuffed, and if I hailed from Europe and noticed that the European Union had agreed -- in principle at least -- to bail out Greece, I might be mumbling, "Vut gives?"

When Greece (a charming though relatively piddling land) comes calling in Brussels, it gets embraced (and lectured); when California (an economic powerhouse) comes calling in Washington, it gets, almost universally, the cold shoulder.

The reason France and the other economic powerhouses of Europe have said they will ride to Greece's rescue is that they share a common currency, and Greece's default could wreak havoc with the value and viability of the euro and, by extension, with the whole of the European economy. But California and the United States share a common currency as well.

And talk about wreaking havoc: There is no legal provision under which an American state can default, whether Carly Fiorina knows it or not, so California can't repudiate its debts. What it can do, however, is raise taxes and tuition and lay off teachers, cops and nurses. And to truly bring its budget more into balance, it must do this on a massive scale, surely engendering a new round of disastrous foreclosures and bank failures.

Besides, California matters economically a lot more to the United States than Greece does to Europe. California is, of course, the largest state; one out of eight Americans is Californian, and the state's economy makes up roughly 13% of the nation's gross domestic product. Greece is home to just 2% of the EU's citizens and constitutes 2% of the EU's GDP. Though California's woes may not directly destabilize the dollar, they can do more to retard America's recovery than Greece's travails can screw up Europe.

It's true that both the Golden State and the Cradle of Democracy have massively dysfunctional political cultures. Arguably, Greece's new Socialist prime minister, George Papandreou, has made a more impressive start at cleaning up his nation's chronic corruption than California has done in dealing with its political gridlock. But each of these economies would be beleaguered -- California has lost most of its major manufacturing and Greece never really had any -- even if their political systems ran like a Swiss watch.

Any talk of a California bailout raises domestic hackles, of course. With virtually every state raising taxes and cutting services to get through the recession, why should California get special treatment? As the backlash against Sen. Ben Nelson's healthcare-bill-cum-federal-aid-to-Nebraska deal demonstrates, having the feds help only one state out of a problem that the other 49 also confront is a classic nonstarter.

Some of the Democratic critics of the Nelson deal, however, didn't want it simply scotched. They proposed instead that every state get what Nebraska would get -- federal assistance to pay for the new Medicaid patients covered under the healthcare reform. And part of the answer to California's problems is exactly this kind of solution.

Under the American system of federalism, some functions are paid for by the federal government (defense and Medicare, for example), and some are paid for by states and localities (schools and local roads, for instance).

The difference, which becomes all important during major economic downturns, is that the feds can and do run Keynesian deficits, while the states, which must balance their budgets, can and do turn into (in New York Times columnist Paul Krugman's evocative phrase) 50 Herbert Hoovers. While the feds enacted a $787-billion stimulus, the states, according to the Center on Budget and Policy Priorities, were experiencing a two-year budget shortfall, which they had to close through program cuts and tax hikes of $350 billion.

So in the U.S. during downturns, the feds stimulate the economy and the states depress it simultaneously. In virtually every other major democracy, either the national government pays for most of the programs (such as education) that states and localities pay for here, or their states and provinces are allowed to run deficits during downturns.

I'll grant you that California can't get a bailout for itself, but that really shouldn't be its task. What it should be demanding is that the federal government assume responsibility (whether temporarily or permanently is a larger discussion) for important functions in every state -- functions such as education, so that grade-schoolers don't have to share their teacher with 40 other kids until the economy comes back.

Dream on, right? For now, the European Union is showing itself to be a more functional federation than the United States. You don't have to be an Austrian-born California governor to think, "How crazy is dat?"

Harold Meyerson is the

editor at large of the American Prospect and an Op-Ed columnist for the Washington Post.

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