Will California be our Greece?
Although Greece’s output is just over two percent of the European Union economy, its financial collapse roiled continental markets and required an international bailout package. Imagine what would happen to U.S. markets if California, which is 13 percent of the national economy, experienced a Greek-style implosion.
Far-fetched? The similarities in fiscal irresponsibility are hard to miss.
California and Greece have massive unfunded liabilities. A recent study by a group at Stanford University pegs California’s unfunded pension liabilities at $500 billion. But that only includes state debt for California. When you factor in California’s 13 percent stake in the U.S. economy, which is saddled with $13 trillion in debt, the state’s total debt liability is over $2 trillion. Some analysts peg Greece’s unfunded liabilities at a similarly astronomic level. And these numbers only tell a piece of the story.
In many ways California as a state has bigger problems than Greece as a country. The unemployment rate in California is higher than that of Greece. And California spends more on many government programs. For example, the 167,000 inmates in California prisons occupy 11 percent of the budget, or $8 billion. By comparison, Greece prisons hold only 12,300 prison inmates.
Both California and Greece suffer from a huge number of unionized government employees accustomed to large defined benefit packages, including annual salary increases and lifetime pensions. Much has been made of the ability of Greek government workers to retire at the age of 53. In California, government workers can retire at 55. As Republican gubernatorial candidate Meg Whitman has noted, the amount California spends on its pension programs has increased by 2,000 percent in the last decade to over $7 billion annually.
The Greek unions took to the streets when asked to contribute to minor austerity programs. California’s 350,000 government employees are also likely to resist any effort to cut their entitlement packages, much less their jobs. The best scenario political leaders plan for is modest attrition.
California’s problems are being compounded as businesses leave the state. Last month’s announcement that Northrup-Grumman was shifting its headquarters to Virginia followed HP’s announcement that it was also moving out. Maybe these departures have something to do with Chief Executive naming California as the worst state in which to do business, and with the Tax Foundation ranking California as the 48th worst business tax climate in the nation. California also insists on its own rules for gas mileage, silly ubiquitous pregnancy warnings and even its own TV energy usage standards. The message California sends to businesses is clear: Stay away.
California issued $3 billion of scrip last year because it couldn’t pay its bills. Standard and Poor’s responded by downgrading the state’s credit rating from “A” to “A-minus.” This year, Gov. Arnold Schwarzenegger is valiantly trying to close a $20 billion budget deficit but his lame-duck status and a partisan legislature make real change all but impossible. Even the governor’s obvious but modest trial balloon about taxing marijuana sales was shot down by Californians, who refuse to accept the need for triage.
In 2011, California’s new Governor will face bigger challenges. By then, most of the nearly $300 billion given directly to the states in cash as part of the 2009 stimulus package will have ended. California’s new Governor will likely ask the feds for more money. But it may be that the new, and possibly Republican, Congress will be less willing to bail out states which managed to avoid necessary spending cutting cuts.
What will happen? States cannot go bankrupt under our law. They can just stop paying debts owed. If things get worse, bond ratings will continue to drop, payments will not be made, and the new governor will have to choose between paying government pensioners and cutting services and government employees.
We saw what decades of fiscal irresponsibility have led to in Greece: Fiscal collapse, billion-dollar bailouts and violent riots. In late February, the Telegraph reported that JP Morgan head Jamie Dimon said that California is a bigger risk than Greece. I think he is right.
Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA), the U.S. trade association representing some 2,000 consumer electronics companies.
Note: This article was updated on May 27 to correct information regarding California’s gross domestic product.