Right-Wing Analysts Predict CA Debt Default

The economic forecasters at Cal Lutheran University (who used to be based at UC Santa Barbara) are out with a new forecast that includes the headline claim that California is likely to default on its debt. In the words of lead forecaster Bill Watkins:

Our governor and legislature used every trick in their books when they created the most recent budget. They even resorted to mandatory interest-free loans from the taxpayers. Now, they have no idea where to go. The Democrats have declared that they will not allow budget cuts. The Republicans will not allow tax increases. They have probably run out of smoke and mirrors, although their ability to engage in budget gimmickry is amazing, enough to make an Enron accountant blush. No one is considering raising revenues by increasing economic activity.

In my opinion, California is now more likely to default than it is to not default. It is not a certainty, but it is a possibility that is increasingly likely.

Watkins then realizes that CA would be entering uncharted territory, that a CA default would spark a financial crisis on par with the failure of Lehman Bros in September 2008, and argues for a “balanced budget” and aid from the federal government and the Federal Reserve.

But nowhere does Watkins explain that a CA default is legally difficult, if not impossible. The state constitution mandates that debt service is the first use of public funds, followed by education. It’s entirely conceivable that state government, in a media climate where spending cuts are still seen as preferable to tax increases, will just keep chopping away in order to ensure that we avoid a default.

That’s the solution being imposed in Greece to avoid a default, and it seems likely that like the ECB and EU leaders, the Federal Reserve and US political leaders will similarly tell CA that the primary solution has to come through further spending cuts, regardless of the negative economic impact.

The forecast also argues that CA will not see new job creation until the second half of 2011 (two long years from now) and that the recovery will be “tepid.” Not much to argue with there.

However, the forecasters give themselves away when they throw in an entirely unnecessary article titled “How to Bring Back California.” It reads like Meg Whitman’s campaign platform, leading off with a ridiculous and evidence-free attack on AB 32:

Clearly, California creates an almost insignificant amount of the world’s carbon dioxide emissions. Whatever we save because of regulation will be insignificant. For one reason, much of our potential output will simply be moved to other places, with the possibility that total world output could increase. Even if we were to reduce carbon emissions to zero, China’s growth alone would offset our decline in only 15 months.

California alone cannot even impact global concentrations of carbon dioxide, much less be the solution to any carbon problem. However, California’s regulations are impacting Californians’ lives in distressing ways.

California’s regulations, particularly AB32, have made the state uncompetitive relative to other states. Businesses that might otherwise be in California are expanding and creating job opportunities elsewhere, while Californians suffer.

This is so absurd it’s hard to know where to begin. First, they offer no evidence at all that AB 32 is costing the state jobs. Further, the notion that CA doesn’t really impact the climate so why bother is itself utterly ridiculous – every place has to do its part to reduce carbon emissions, and CA merely took the lead in doing so when the federal government refused.

Did Watkins include the impact of the climate crisis on his economic forecast? Has he considered that the drought plaguing Central Valley farmers might have something to do with global warming? That the state’s economic recovery cannot survive further climatic shocks?

Apparently not, because that would conflict with his baseless right-wing attack on climate legislation.

Watkins goes on to argue that somehow we can strengthen K-12 education without spending more money, and build a 21st century infrastructure, though without even once discussing how it is to be funded.

The right-wing framing of this economic analysis should be considered when assessing some of its headline claims. California is facing a severe economic crisis, but these proposed solutions would merely make matters worse, not make them better.

One thought on “Right-Wing Analysts Predict CA Debt Default”

  1. The Legislature and the governor have made all sorts of spending decisions that the courts later found to violate the constitution.  If they suddenly forgot to mail checks to the state’s bondholders for a few months, a judge would remedy the situation eventually, but in the meantime the state could keep the lights on.

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