Imagine a western country with a population of about 40 million people and an economy the size of Spain or Italy. After years of dysfunctional politics and amid a global recession, it teeters on the verge of bankruptcy—forced to choose between eliminating the most basic services for its citizens and defaulting on its massive debts. Such a country has a way out through the International Monetary Fund (IMF).

But if the dysfunctional economy is not a country but, say, California, a way out suddenly seems less clear.

In 1978, California's voters approved Proposition 13, which changed the state constitution to require a two-thirds majority vote of the state legislature to raise taxes. Meanwhile, the state's progressive constitution allows voters to impose spending requirements on the legislature, borrow money or amend the constitution by a simple majority vote.

Voters everywhere want low taxes and generous government benefits. In most government systems, they elect legislators who try to balance these imperatives. But only in California can voters both give themselves tax cuts and require the state legislature to spend more money on their chosen programs. Well-meaning initiatives have taken large chunks of the budget out of the legislature's control and have saddled the state with heavy interest payments on endless bonds used to pay for infrastructure such as new schools and earthquake retrofitting for public buildings. These sound nice when described in one sentence on a ballot, but funding them through debt is unnecessarily expensive and limits the legislature's options, short-changing less sexy programs such as services for the poor.

Slightly more than a third of the seats in the legislature are firmly controlled by Republicans. Amid a constant threat of primary challenges from the right, these legislators refuse to support any tax increases under virtually any circumstances. The results are predictably disastrous: California faces massive debts, declining services and a budget that seems perpetually in crisis.

The Obama administration seems disinclined to help, even as it is seeking $100 billion in loans for the International Monetary Fund itself—an amount that could easily solve California's problems.

Gov. Arnold Schwarzenegger, who was out of the state the day of the ballot-box meltdown, has proposed slashing services for the poor with much more enthusiasm than he ever brought to defending the initiatives he backed. If his proposals are adopted, the California Budget Project estimates the state will stop providing medical coverage for 1.9 million people, including 900,000 children, and also stop providing home care for 400,000 disabled senior citizens.

The governor also proposes entirely eliminating CalWorks, the state's welfare-to-work program which currently provides 1.1 million children and 300,000 adults from low-income families with cash grants. Dozens of other programs, from school buses to poison control, are being cut or eliminated altogether. California's already beleaguered education system is seeing further cuts, the state government is raiding local governments, and the governor proposes borrowing $5 billion from next year's tax revenues to balance this year's budget. No state has ever declared bankruptcy—but there’s a first time for everything: The situation is so bad that the state is cutting funds that are matched 2-1 or even 3-to-1 by the federal government, multiplying the pain for California's poor.

President Obama has said he doesn't want to run car companies, but he also knows that letting giants like General Motors collapse would be far worse. Similarly, the president surely doesn't want to run California, but letting it slash government to the point where it makes Alabama look like Sweden would cause vastly more suffering than a failed GM ever could.