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. 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!
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 Obama 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.
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.
What Megan is forgetting here is that almost every state in the Union is negatively balanced, and relies every year on Federal money to keep them solvent. Maybe California is much, much worse than Kansas, which is worse than Utah, or whatever. And I'm not a fan of California legislature, or their wacky solutions to problems, or their economic structure, or their trying to strongarm the Federal Government on EPA regulations, or their election of an underqualified He-Man as a governor, or their gleeful participation in (and primary cause of) the housing bubble.
But let the state that is solvent cast the first stone at California. In Fiscal Year 2007, the Federal government paid $232 billion to states to help cover deficits. The 2007 Federal deficit was only $163 billion, so if the states hadn't required Federal bailout money, then the Federal government would have run a budget surplus!
If the Federal government allows California to go bankrupt by denying them Federal dollars, it should deny all other states the same allocations.