As California Goes...

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One of the most often quoted stats about California is that, were we a nation, we'd be the world's eighth largest economy.

But such power can also work in reverse, say economists. And now, there is speculation that whatever ugly deficit deal state lawmakers strike, its necessary slashing of public services could either slow, or stop, the economic recovery of the entire nation.

That possibility was the focus of my story this morning on The California Report. And, if anything, it should serve as a word of warning to leaders in Washington, DC, who seem reluctant to do very much to help California out of its current plight.

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One prominent critic of that hands-off stance is James Galbraith, a nationally known economist and professor at the University of Texas. "The cuts that California is being forced to make," he says, "they’re deeply counterproductive to the recovery of the national economy."

Galbraith acknowledges that some of the deficit problems of California government are of its own making, but says that much of the current crisis is global in nature. And furthermore, he wonders why such a powerful economic engine for the nation is getting the cold shoulder, while less-deserving entities did not.

"I would have to ask," says Galbraith, "why didn’t they say that about Bank of America? Why didn’t they say that about Citigroup? What’s so special about these big banks -- which we, in fact, have more of than we need -- that doesn't apply to the public services being provided to the citizens of the United States who happen to live in California?"

Last week, the administration of President Barack Obama squelched any such talk for the time being. "This budgetary problem," said press secretary Robert Gibbs, "is one that they're going to have to solve."

To be fair, though, state leaders haven't been asking for money... an pretty important fact that seems to have been missed by the national press. Particularly baffling was last week's story in The Washington Post, which raised the spectre of California begging for a bailout.

What California wanted was not money, but rather a loan guarantee. Such a 'backing' of the state's debt, first floated last month by Treasurer Bill Lockyer, would have helped the state get a better deal on its need for as much as $10 billion in cash flow borrowing in July.

Without that guarantee, says Lockyer, "you wind up kind of 'bare' as they say in the market, and you pay more to get that borrowing done."

Lockyer doesn't have an estimate on what the extra cost will be, but guesses it will be in the hundreds of millions of dollars... a cost paid with the same dollars that otherwise would go to vital state services.

Which begs the question: why can't Callifornia get anyone to listen? "It's hard to see how the country recovers if California does not," says U.S. Rep. Zoe Lofgren (D-San Jose). Lofgren says she thinks congressional authorization of loan guarantees for any state will happen. But no one thinks it'll happen in time for California, which needs to go to market -- assuming a budget deficit deal is agreed to in the state Capitol -- early next month.

Lofgren says she's particularly troubled that the national stimulus and recovery programs... which are expected to benefit California by as much as $80 billion... could be drained of their help by the cuts needed to balance the state budget. "It is contrary to the efforts that we're making," she says.

Still, there's not much chance that legislators and Governor Schwarzenegger can avoid painful cuts. And there's some sense out there in the rest of the nation that California should just take its lumps and zip it. One great example: the June 1 editorial from the Mobile (AL) Press-Register, entitled "Cut California Loose." An excerpt:

Now Gov. Schwarzenegger and other state officials are pleading with President Obama to save Cal-lee-FORN-ya, as the governor calls it. They want the federal government to guarantee the state's dicey loans.

If the president and Congress go along with this, expect every profligate state to go to Washington, hat in hand, asking for federal help. With the federal deficit soaring toward $2 trillion and President Obama pushing for at least $700 billion more in deficit spending, the added cost of bailing out irresponsible politicians all over the country could be the tipping point for our debt-crazed nation.

Treasurer Lockyer says he heard a similar sentiment recently from a big investor from what he would only call a "southern" state, and replied thusly: "Do you realize that we've been subsidizing your state? Because you get more back from the federal government than you send to them [in tax dollars], we get less back from the federal government than we send [in tax dollars] to D.C."

Whether the investor was convinced is another story. Perhaps he should be reminded of the old adage, which has proved true many times before, that as California goes, so goes the nation.

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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