Although Greece’s output is just three percent of the European Union economy, its financial collapse roiled continental markets and required an international bailout package. Imagine what would happen to U.S. markets if California, which is 17 percent of the national economy, experienced a Greek-style implosion. Far-fetched? Consider the similarities.
California and Greece have roughly similar GDP output ($333 billion and $343 billion, respectively), as well as similar debt levels ($500 billion and $552 billion, respectively). But that only includes state debt for California. When you factor in California’s 17 percent stake in the U.S. economy, which is saddled with $8 trillion in debt, the state’s total debt liability is over $1 trillion.
In many ways California as a state has bigger problems than Greece as a country. The unemployment rate in California is higher than that of Greece. And California spends more on many government programs. For example, the 167,000 inmates in California prisons occupy 11 percent of the budget, or $8 billion. By comparison, Greece prisons hold only 12,300 prison inmates.
Both California and Greece suffer from a huge number of unionized government employees accustomed to large defined benefit packages, including annual salary increases and lifetime pensions. Much has been made of the ability of Greek government workers to retire at the age of 53. In California, government workers can retire at 55. As Republican gubernatorial candidate Meg Whitman has noted, the amount California spends on its pension programs has increased by 2,000 percent in the last decade to over $7 billion annually.
The Greek unions took to the streets when asked to contribute to minor austerity programs. California’s 350,000 government employees are also likely to resist any effort to cut their entitlement packages, much less their jobs. The best scenario political leaders plan for is modest attrition.
California’s problems are being compounded as businesses leave the state. Last month’s announcement that Northrup-Grumman was shifting its headquarters to Virginia followed HP’s announcement that it was also moving out. Maybe these departures have something to do with Chief Executive naming California as the worst state in which to do business, and with the Tax Foundation ranking California as the 48th worst business tax climate in the nation. California also insists on its own rules for gas mileage, silly ubiquitous pregnancy warnings and even its own TV energy usage standards. The message California sends to businesses is clear: Stay away.
California issued $3 billion of scrip last year because it couldn’t pay its bills. Standard and Poor’s responded by downgrading the state’s credit rating from “A” to “A-minus.” This year, Gov. Arnold Schwarzenegger is valiantly trying to close a $20 billion budget deficit but his lame-duck status and a partisan legislature make real change all but impossible. Even the governor’s obvious but modest trial balloon about taxing marijuana sales was shot down by Californians, who refuse to accept the need for triage.
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