Arnold Schwarzenegger has made a personal overture to the heads of America’s largest banks to persuade them to accept the IOUs being issued by California in lieu of cash.
With a budget deficit of more than $24bn, California has started its new financial year deep in the red and has been forced to issue the IOUs because it has run out of money.
The state has been buffeted by the recession and the property collapse, while an over-reliance on income taxes and capital gains taxes paid by high-earners has put additional pressure on the state’s coffers.
The state has asked its public employees to take three unpaid days of holiday each month to preserve funds. Meanwhile, Mr Schwarzenegger has spent the past few days locked in talks with the members of the state legislature.
From what I've read, there are a number of factors in California's economic collapse. The recession that is hitting everyone is hitting California worse because of its high number of illegal immigrants who suck out resources without putting much of anything back in (in tax revenue). The housing collapse hit California particularly hard because it had a lot of illegal immigrants who couldn't pay their mortgages, and the price of real estate was inflated for everyone, so when the bubble burst it burst extra hard there. The high taxation rates of recent years have driven upper-income earners out of the state by the thousands, and the state's reliance on income tax has taken a pounding by losing those earners. And, in the name of greenery, the state has implemented ridiculous regulations and policies to protect the environment which have have severe ramifications for the economy. Roll these things all together, and it's no surprise at all that the state is bankrupt and unable to pay its employees.
Heritage offers a warning to the rest of the country about California's financial woes:
More government -- like higher taxes and more regulation -- is precisely the opposite of what an economy needs to grow and thrive and preserve freedom. But, that is what California has done, and it has ended disastrously. The federal government is headed down the same road, and is certain to follow California into financial peril unless things are turned around fast.Supposedly, trends start in California and then spread to the rest of the country, a notion that seems to be confirmed by the latest economic news. In May, California’s unemployment rate hit 11.5 percent—the highest it has been since 1941. This morning we learn that unemployment for the entire country hit 9.5 percent in June—the highest rate in 26 years.
Will the country close the economic-death-spiral gap with California? Very possibly it will, if the federal government continues to follow California’s example of crushing its economy with ever-increasing government spending, taxing, and regulating.
According to the Pacific Research Institute’s U.S. Economic Freedom Index Report, only three states have lower economic freedom scores than does California. The PRI index is a broad measure of how state governments impact their economies through tax, spending, and regulatory policies.
The lesson from California should be that high taxes, high spending, and lots of regulations is not a model for economic growth, yet those are precisely the policies that President Obama and Congress are pursuing. Federal spending this year will be about 26 percent of gross domestic product, the highest level since World War II. And the long-term outlook is even worse if nothing is done to reform entitlements.
Meanwhile, the House of Representatives has passed a global warming bill that will do nothing to stop global warming, but will cost the economy an average of $393 billion per year. Even here, California appears ahead of the curve, as the EPA has just approved a waiver that will allow California to impose its own tougher limits on carbon emissions from cars.
The first step is to stop the rampant spending on programs like cap-n-
California should be a lesson we take to heart.
There's my two cents.
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