Is California Too Big to Fail?

So what about California? A reader asks. Ummm, that's a tough one. No, wait, it's not: California is completely, totally, irreparably hosed. And not a little garden hose. More like this. Their outflow is bigger than their inflow. You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money that comes in during the booms, borrow some more, and then act all surprised when revenues, in a totally unprecedented, inexplicable, and unforeseaable chain of events, fall during a recession. You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets. Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice.  But actually, we do have a choice:  we could let them go bankrupt.  And we probably should.

I am not under the illusion that this will be fun.  For starters, the rest of you sitting smugly out there in your snug homes, preparing to enjoy the spectacle, should prepare to enjoy the higher taxes you're going to pay as a result.  Your states and municipalities will pay higher interest on their bonds if California is allowed to default.  Also, the default is going to result in a great deal of personal misery, more than a little of which is going to end up on the books of Federal unemployment insurance and other such programs.

Then there are the actual people involved.  Whatever you think of, say, children who decided to be born poor, right now they are dependent on government programs, and will be put in danger if those programs are interrupted.

On the other hand, I don't really see another way out of it.  If Uncle Sugar bails out California, California will not fix its problems.  Perhaps you want Obama to make it fix the problems, using the same competence, power, and can-do spirit with which he has repaired all the holes in the banking and auto manufacturing sectors.  But Obma is not in a good position to do this.  California Democrats are a huge part of his governing coalition.  All Obama can do is shovel money into the bottomless pit of California's political system.

Moreover, even if the administration could fix any of the core problems of California--and New York--and the banks--and the automakers--and the energy industry--they can't fix them all.  Especially given how thinly staffed Treasury is.  The president and his cabinet only have so much attention, more than all of which seems to be occupied by the problems already on their plate.  They don't really have the time, knowledge, energy, or staff to take on running a whole 'nother government.

California will go bankrupt, muni and state debt will spike, the federal government will backstop humanitarian programs and very possibly all state and local debt, and eventually, California will figure out whether it wants higher taxes or lower spending.  But we will not actually make the world a better place by enabling the lunatics in Sacramento to pretend they can have both.