On such a summer's day in 2009, when too big to fail has practically become a national slogan, you would think that the Obama administration would find it in their hearts and their pockets to lend some bailout money to the state of California, which now faces a $24 billion deficit. But no. The early word from DC is that the administration has refused to bail out California and that Arnold Schwarzenegger will be forced to take whatever lessons he learned when playing Mr. Freeze and apply them to government spending.


Is Obama doing the right thing? I think so. As my colleague Megan has pointed out, it's one thing to consider California in a vacuum -- one-eighth of our population and almost one-seventh of our GDP cannot be abandoned! It's another to consider the precedent of bailing one state while another 49 gaze on with hangdog eyes and tightening wallets:

But what happens if we bail California out? New York had a fifteen billion dollar budget deficit; why should the Empire State struggle to balance its budget while its citizens' federal tax dollars leak westward? Why not Texas, or Florida? Why not all the states, for that matter? And if the Federal government does bail them out, why bother with any fiscal restraint at all?

Exactly. Frankly I like the fact that government is making California sweat for it. There is absolutely no reason for Obama to accept the state's overtures now without making them think seriously about budget reform, or raising taxes, or reconsidering their '70s-era relics of proprety tax straitjacketing. Never letting a crisis go to waste should mean forcing California to rethink the way it taxes property, spends scarce resources, pays government employees, etc.

But eventually, alas, the government will almost certainly provide some kind of relief. One way the Obama administration could bail out California without creating a perverse incentive for other states to fail as quickly as possible could be to redirect stimulus money to California at an expedited pace to plug up holes in the deficit while California sets about the arduous task of finding revenue sources and things to tax (marijuna, hello!). If we get more wrapped up in the business of California, such as offering federal guarantees for loans, Obama has to ask for painful concessions upfront. The business of bailing out a state must be to make the bailout both effective in the longterm and seemingly painful in the short term, so that we don't open up the country's drive-thru ATM to the rest of the country's emaciated state deficits.

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