Lemme welcome everybody to the Wild Wild West

Lemme welcome everybody to the Wild Wild West

by digby

Click on the above chart. As you can see, California has the largest state economy in the US. And it is also the 9th largest economy in the world, ahead of Spain, India, Canada, Russia and Australia. Unfortunately, the 9th largest economy in the world, already reeling, is about to go through another hit of austerity:

The state budget shortfall in California has increased dramatically in the last six months, forcing state officials to assemble a series of new spending cuts that are likely to mean further reductions to schools, health care and other social programs already battered by nearly five years of budget retrenchment, state officials announced on Saturday.

Gov. Jerry Brown, disclosing the development in a video posted on YouTube, said that California’s shortfall was now projected to be $16 billion, up from $9.2 billion in January. Mr. Brown said that he would propose a revised budget on Monday to deal with it.

“We are now facing a $16 billion hole, not the $9 billion we thought in January,” Mr. Brown said. “This means we will have to go much further and make cuts far greater than I asked for at the beginning of the year.”

Mr. Brown disclosed the news in a video that had all the trappings of a campaign announcement. In it, he aggressively accounted for the steps he said he had taken to try to scale back a $26 billion deficit he found upon taking office. And he urged viewers to back an initiative he is putting on the November ballot that would increase sales taxes by 0.25 percent and impose an income tax surcharge on wealthy Californians to try to stave off more cuts.

State officials said Mr. Brown’s proposal would include a package of immediate cuts, as well as others that would be triggered only if voters failed to approve his tax plan. The sales tax increase would expire after four years, while the income tax surcharge would last for seven years.

State officials said the shortfall was a result of disappointing revenue collections in April as California continued to struggle to pull out of the recession. “We are still recovering from the worst recession since the 1930s,” Mr. Brown said.

It's possible that the people will agree to the tax increases, of course. The income taxes fall mainly on the very wealthy. But California's history suggests they won't. So what happens then? Is California going to be the kind of drag that Spain is on Europe's economy? I don't know. But recall how Paul Krugman compared Ireland and Nevada a couple of years ago:

Climate, scenery and history aside, the nation of Ireland and the state of Nevada have much in common. Both are small economies of a few million people highly dependent on selling goods and services to their neighbors. (Nevada’s neighbors are other U.S. states, Ireland’s other European nations, but the economic implications are much the same.) Both were boom economies for most of the past decade. Both had huge housing bubbles, which burst painfully. Both are now suffering roughly 14 percent unemployment. And both are members of larger currency unions: Ireland is part of the euro zone, Nevada part of the dollar zone, otherwise known as the United States of America.

But Nevada’s situation is much less desperate than Ireland’s.

First of all, the fiscal side of the crisis is less serious in Nevada. It’s true that budgets in both Ireland and Nevada have been hit extremely hard by the slump. But much of the spending Nevada residents depend on comes from federal, not state, programs. In particular, retirees who moved to Nevada for the sunshine don’t have to worry that the state’s reduced tax take will endanger their Social Security checks or their Medicare coverage. In Ireland, by contrast, both pensions and health spending are on the cutting block.

Ok, that's true for California as well, at least as far as the elder programs are concerned (so far.) However, the consensus seems to be that other federal programs like unemployment, food stamps and medicaid need to be cut back --- they're promoting general laziness among the parasites and all. I think we're going to continue to see a shrinkage of federal financial support for the states as well as continued shrinkage of the federal workforce. (According to this California has more federal workers than anywhere else in the country.)

And the drag of these state government austerity programs --- most of them operate under a balanced budget requirement --- is already a huge drag on the national economy:

Commenting on the first graph, Krugman said last month:

Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it’s therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending.

So we're already in an austerity cycle and there's little hope that I can see for any change at the political level. Indeed, everything indicates the government is going to cut back even further.

If the federal government continues to refuse to help out the states financially --- especially a state as large as California, whose economy is actually bigger than Spain's, it's hard to see how it doesn't drag down the entire country.

Here's Krugman on Spain, just two weeks ago:

So, the euro crisis is risk on again. And this time it’s centered on Spain — which in a way is a good thing, because now the essential craziness of the orthodox German-inspired diagnosis of the crisis is on full display.

For this is really, really not about fiscal irresponsibility. Just as a reminder, on the eve of the crisis Spain seemed to be a fiscal paragon.

What happened to Spain was a housing bubble — fueled, to an important degree, by lending from German banks — that burst, taking the economy down with it. Now the country has 23.6 percent unemployment, 50.5 percent among the young.

And the policy response is supposed to be even more austerity, with the European Central Bank, natch, obsessing over inflation — and officials claiming that the incredibly foolish rate hike last year was actually something to be proud of.

Not exactly the same, but similar enough to be uncomfortable. (Today he says this, and it's not pretty.)

I realize that Europe and the US face different problems. But one of the problems they have in common is a daft belief among policy makers in austerity during a depression As California goes even further into hardcore austerity mode, I'd expect some unpleasant side effects to the US economy as a whole.