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As California’s Economy Goes, So Goes the Country

Posted by Larry Doyle on May 12, 2009 5:15 PM |

Political hacks assert, “all politics is local.” In a similar vein, armchair economists propose, “as California goes, so goes the country.” Why is that? California represents such an enormous part of our country in many respects, including the following:

  – 8 of the 50 largest cities

  – population of approximately 37 million people (that we know of), a full 12% of our national population

  – an economy similar in size to Italy, ranking it as one of the top 10 in the world (I have seen rankings of 8th and 9th)

  – California’s economic output represents 13% of our national GDP!!

  – an unemployment rate north of 11% compared to the national average of 8.9%. With a high unemployment rate amongst illegal immigrants, it is not a stretch that California’s unemployment rate is approaching 15% and its underemployment rate is greater than 20%!!

The results of the Bank Stress Tests indicated that Bank of America and Wells Fargo had the greatest capital shortfalls. Why is that? BofA already had a huge market share in California and it grew exponentially with its purchase of Countrywide. Wells Fargo also had huge market share in California and it only grew with its purchase of Wachovia. Hey LD, Wachovia is a North Carolina based bank, how could that correlate into increased California exposure? Wachovia purchased Golden West Financial, a southern California based bank which had been one of the most aggressive lenders of a mortgage product known as pay-option ARMs. Suffice it to say that product has been a disaster in terms of delinquencies, defaults, and foreclosures.

Earlier this year, California faced a massive budget shortfall and experienced significant political turmoil in passing a budget.  Well, the Governator Arnold Schwarzenegger is right back in the ring as California’s fiscal situation is faced with more sinkholes. The WSJ reports, Cuts Loom in California if Propositions Fail.

While politics may be local, the economic fallout from California can not be walled off from the rest of the country. The capital cushions that BofA, Wells Fargo, and many other banks are forced to set aside against consumer, corporate, and municipal defaults literally ripple across our entire country. The WSJ reports:

California’s fiscal plight is worsening. In a letter sent Monday to the state’s legislative leaders, the governor said the Golden State now projects a new $15 billion shortfall, up from a previous estimate of $8 billion, because of plummeting tax revenue amid the recession. That figure would jump to $21 billion if Californians next week defeat the propositions, Mr. Schwarzenegger said.

Professors Ken Rogoff and Carmen Reinhart, in a dissertation, “Aftermath of Financial Crises,” highlighted declining tax revenues as one of the driving forces to increased fiscal deficits, greater government borrowing, further crowding out, and an underperforming economy. While the Governator is locked in a battle with the legislature, municipal unions, and other constituencies over the state’s fiscal follies, is California an opening act to the same show in Washington over the next few years?

Would our friends from California please share some perspectives? I thank you.

LD

  • sunup

    LD,I live in the Palm Springs area of California. We have a hospitality based economy.
    This past Sunday our local paper had an article regarding the down turn in hotel rooms booked, and the large number of cancellations due to declining business and tourism travel.
    According to the article bookings through the first quarter of 2009 are more than 24,000 room nights down from the same period in 2008.
    Companies are fearful of looking extravagant have cut down on travel and business meetings. They are calling it the “AIG”effect. Unemployment is in the double digits, with a lot more on short hours.
    Thats a lot of room taxes not being collected.

  • TeakWoodKite

    LD Ever since the Enron debacle and GW saying

    “California’s energy problem is not my problem” leaving California 10 billion in the hole to this day we are
    one broke A** state.

    I work for a local public entity. We are laying off people.
    We are looking at a two week furlow with no pay.
    The cost of food is on the rise faster than you can eat.
    Now the feds have cut off water to the central valley and fields are not being farmed. I do not about you but ya might want to watch the price of a head of lettece in NYC go through the roof. Fuel costs are on the rise, California has one of the highest foreclosure rates in the nation
    and that bad debt cannot be absorbed by the state.
    The un-enjoyment rate is actually closer 20 percent,
    which I admit is my “guess”, but as subjective as it
    maybe My sane half does bookeeping and I will tell you
    most of the clients are hand to mouth and flying below the radar.
    This will increase the “underground” economy. If I could I would move to where there ia better water supply,
    since the horses after being lead to it, would rather go thirsty.

    As for illegal aliens working or not, they are one of the major factors as to WHY the California is broke.

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