The California budget crisis may well lead to a second financial calamity that would be far worse than anything experienced over the past 18 months.
A look at President Barack Obama’s budget suggests that the U.S. government’s fiscal situation is in worse shape than California’s.
The deficit relative to gross domestic product for the entire U.S. this year is 12.9 percent, according to White House estimates released last month. If California had the same deficit relative to its GDP, it would be short about $230 billion -- 10 times the size of its current shortfall.
What’s worse, the Obama administration’s attitude toward economic policy comes right out of the California playbook.
Notwithstanding White House claims that the federal deficit will drop to 8.5 percent of GDP next year, there is little cause to believe that the U.S. faces a brighter future than California. That shouldn’t come as a surprise.
The Democrats have controlled the California legislature for most of the past four decades. In spite of protestations by the occasional powerless Republican governor, the Democrats adopted economic policies that define left-wing nirvana.
High tax rates on individuals, of course, hit many small businesses hard. If you wonder why the California economy is going so much worse than most of the country, this is a good place to start.
In case you wondered, California’s sales tax is high, too. Most places in California, the combined city and state sales tax rate is more than 8 percent.
California is in crisis because state spending is so high that even those hefty taxes aren’t enough to balance the budget.
Except for the sales tax, the Obama administration’s plan is to copy California’s policies.
Obama has proposed a massive tax increase on U.S. corporations by curbing the deferral of taxes on corporate income earned abroad. He also has advocated higher marginal tax rates on the rich, by letting George W. Bush’s tax cuts expire.
Even with those tax hikes, Obama projects that deficits are here to stay because, like California’s Democrats, Washington’s can’t resist increasing government spending.
It is easy to see how investors might stop believing in California. If they do, it would be rational for the U.S. to be next.
Obama can't spend his way out of the country debt because it only makes the situation worse.