Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

By the Numbers: Is California Like Greece?

By

Greece is not Greece because its problems were intractable. Greece is Greece because the Greeks chose not to save it.

PrintPRINT
MINYANVILLE ORIGINAL Jordan Weissmann created a stir last week with a column in The Atlantic claiming that it was "crazy" to compare California to Greece. Not just superficial or misleading or inaccurate, but insane. Since my guess is a solid majority of Americans see some validity in the comparison, Weissmann's story should have been "we're surrounded by crazy people," rather than "California is OK."

My interest is in the quantitative issues of the comparison, but Weissman's and most other commentators is partisan. Greece and California, and many other places, spent a lot more money than their taxpayers were willing to contribute, and were dishonest about the numbers. This led Greece to economic disaster. The partisan interest in the question of whether California is like Greece has nothing to do with how the economy of California is likely to evolve in the future, and everything to do with what California politicians should do today. If California is Greece, as some fiscal conservatives claim, it's easy to argue that its legislators should produce honest accounts, cut back on spending and promises, eliminate uneconomic regulation, fight corruption, and reform taxes. If California is not like Greece, there is merit to doing those things anyway, but they may not be so urgent as to overwhelm other considerations.

Stated that way, it's obvious that California's degree of similarity to Greece is a rhetorical device, not a policy consideration. Fiscal conservatives believe California requires dramatic action to avoid disaster; how similar that disaster might be to Greece isn't the point. Their opponents are willing to trust that moderate actions and kinder, gentler reforms will keep the California economy from falling over the precipice. Whether that's Greece's precipice or some other one doesn't matter. The point is there are plausible disasters and precipices.

Weissmann cites five factors that will keep California from becoming Greece, in fact that make it insane to believe California can become Greece. The first one is that California is bigger than Greece. That one baffles me. Why is it crazy to believe big economies can fail the same way smaller ones do? What about "the bigger they come, the harder they fall"? And there are some California-sized economies that have failed in the past, and there will very likely be more in the near future.

The next two make little more sense. They show that California's Gross Domestic Product is growing faster than Greece's, and that its unemployment rate is lower. But that's Greece today, after disaster hit. California's current rates are considerably worse than the Greek rates in the period that led to its crisis. If 4% GDP growth over a decade with 7% unemployment didn't save Greece, why should we think 2% GDP growth over a year with 11% unemployment will save California? It is true, as Weissmann points out, that California has a more complex and dynamic economy. But that cuts both ways. It makes California more resilient to external stresses, but also more dependent on complex internal and external economic relations. It means California's business can withstand more government burden, but it also means they can relocate more easily.

The last two points Weissmann makes are the keys to the partisan dispute. He claims California's debt is 5% of GDP, versus 132% for Greece, and that it has a budget surplus instead of Greece's 9% deficit. The big protection is that California has a constitutional requirement to run a balanced budget, so it cannot get into trouble. Weissmann does admit it's not perfect. "Sometimes tax revenues come in a bit lower than expected. Sometimes they finish out a bit higher. California has run some relatively small budget deficits in the past."

I'm more cautious than Weissmann about accusing other people of being crazy, but I'm tempted to at least request psychological evaluation for someone who believes California runs a balanced budget, a little surplus one year, a little deficit another, and owes only about $100 billion (5% of California's $2 trillion GDP). What does he think other people are worried about? Shouldn't California have a AAA credit rating with those numbers instead of trembling near junk status? Why are big cities in California filing for bankruptcy? Why did the state run out of money repeatedly? How come there are $400 billion of California municipal bonds outstanding? How did California run up even $100 billion in debt without running persistent large deficits? Why did the US Bureau of Census compute California's total debt at $374 billion in 2009, and say that it excluded all sort of things? Assuming he's sane, it seems likely Weissmann has not thought deeply about California's debt problem.

< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE