This recession has one more dip in it before it’s over. The problem doesn’t stem from Obama’s stimulus package: California’s fiscal woes will be the cause.
If California were a country, its economy would be ranked 8th in the world – smaller than France and Italy and larger than Spain and Canada. All of the ten largest economies in the world have adopted aggressive stimulus policies. All, that is, but California. This is going to undermine Obama’s efforts to stimulate the economy.
Californians recently voted against taxing themselves more and will now start slashing programs. For instance, professors within the state university system will be put on furlough and lose about 10% of their income. Layoffs, program cuts, and discontinuation of services will hit every community. These, just as the economic numbers for the US are looking better.
California’s contraction won’t be enough to completely de-rail the recovery. It will, however, delay it by one or two quarters.
Governor Schwarzenegger now finds himself in the same position as Gray Davis – the governor he replaced in a recall election. The problem wasn’t Davis or Schwarzenegger. California is the only state to require a two-thirds vote in the Legislature for BOTH tax increases and budget approval. A small minority can hold the legislature hostage and the odds of finding agreement among 66.6% of the diverse population of Californians on anything – much less tax and budget – are close to 0.6%. Until this system is changed, California’s problems will continue and the requirement for balanced budget means that the state government will always exacerbate down turns and bubbles alike.
California’s budget problems are about to spill over into the rest of the nation. Expect the economic numbers to fall again in the Fall. And look for the cause in California.