May 20, 2009

Let California Fail!

Got your attention? Good because I'm serious. Mostly. Anyone, including those in California, who opposed the bailouts of the banks, or the auto industry, has to oppose the bailouts of the states as well.

Why? Free market rules dictate that it should be played out that way. States have had their independence for over two centuries. They are free to experiment with things like their own automobile emission standards, gay marriage, taxation and a myriad of other things. In fact most anything not federally governed, which is a lot, is in the domain of the states.

California has chosen to create a Byzantine taxation and expenditure strategy. They have chosen to try to impose their own emission standards on other states by having standards that automakers have had to struggle to meet. They have chosen to make some very unusual governance choices. In not so polite terms, they represent one of the failed experiments in governance. The framers of the Constitution either wittingly or unwittingly (I suspect the former) had free market principles in mind when they gave the states such latitude in decision making and independence. Why would the founding fathers give the states the chance to fail so disastrously? Because it also allows them the chance to succeed spectacularly.

Failure is to be expected in a free market. It consists of a lot of trial and error. But the same is true for success. As a business owner, how does one mitigate the potential for failure? By watching, learning and then imitating successes. One does not typically wander off on some strange tangent without at least a hint of some past related success to build upon.

The same is true for states. If Oklahoma is prospering and California is failing, California has to look at what Oklahoma is doing right and copy it. Or at least build on it and modify it for California's circumstance. California had 49 other states to look at for ideas. Instead they have chosen to barrel headlong off a cliff of their own Utopian choosing. Nice work. Voters in California on Tuesday said 'Enough!' Patching up the wagon as it's about to careen over the cliff, does no good. Reigning in the horses might give you a shot at staying alive. And that's what the voters have seemingly opted their government do. Real fixes have just been demanded.

Even Californians want the status quo stopped. In other words, the status quo has failed, let it die. Not California, the current method of governance.

Now it's easy to say from a thousand (plus) miles away, "let 'em fail", but it does have real world implications, ones that extend beyond California's borders. For example if they have considerable debt held by American banks, it puts more pressure on the creditors and re-ignites the TARP problems. And then there's the international confidence in American institutions that could be impacted. If California owes money offshore - then what? It's not so simple in reality. So saying let California fail, isn't as realistic an option as it should be. But there are alternatives to a bailout. They amount to letting California regain it's feet on it's own. And California should be left to fend for itself, with the opportunity to grab a lifeline.

Why? Because here's the crux of the matter; rewarding bad behavior encourages more bad behavior. It means more eventual debt and continued foolish decisions by California's state government.

Drastic changes in the non-Obamian vein are what's required. If I were in the President's shoes, here's what I would do; I would offer a loan, not a bailout. The loan would come with conditions.
  • The California government would be required to balance it's next fiscal budget. It doesn't matter how, that's a state decision. But they have to run a balanced or surplus budget.
  • The state would be required to repay the loan to the federal government over a number of years that is reasonable and commensurate with the final amount of the eventual loan. In addition, the loan would charge interest.
  • State taxation and spending rules would be required to be brought in line with states that are not facing economic crises. For example, Alaska's.
  • The state would be required to ease up on rules governing corporate behavior, and off-shore drilling.
  • Does San Fransisco still have that law banning the use of used underwear for wiping one's car? Obviously, that's got to go.
California - You don't need to worry, I'm not the President. In fact, expect that President Obama's approach is going to be completely predictable. This is a bad situation for him, but his approach is easy to foresee.

If he refuses to help the state, he will save money but look hypocritical in the process (bailing out companies is okay, but not a state government?). If he refuses to help, he potentially loses the electoral vote rich state in 2012, and perhaps loses Democrats seats in 2010 as well.

On the other had if he does bail out California, he loses popularity in other states who will resent having to shoulder the burden for yet another failure. And in addition he has to pony up considerable cash that the US government can't afford. However the money to be spent is not his generation's problem, so it's not his problem. The next President (after 2016 as he sees it) will have to deal with the mess, and the next generation can pay for the mess.

Additionally, he probably figures that if the economy picks up and it can be made to look like he's rescued the economy - he keeps California and probably gains back some or all of that lost support in other states.

Obama will bail out California. Sad, but true.

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