It seems like there’s a lot of panic in the markets over Greece’s situation at the moment. Other European leaders, particularly Angela Merkel and Nicolas Sarkozy, have had to make the situation a direct priority, committing more than a trillion dollars to defending Greece and other struggling European economies against collapse.
Greece’s GDP is about $330 billion and its budget deficit is about 13%, give or take. California’s Gross State Product is $1.812 trillion but I don’t know what its deficit is. I’ve heard it’s in pretty dire straits though and I’ve heard comparisons with Greece. I’ve seen figures in the tens of billions for its deficit, which doesn’t sound very high compared to Greece. Is that why it’s not such a problem? Is the federal government subsidizing it just like the European governments are? Is there another reason it’s not as much of a problem? Or is it as much of a problem?
CA’s problems are more political then fiscal, its deficit is something like 20 billion, so like 1% GSP. The political stucutres of CA make it very difficult to raise taxes or cut spending.
Plus Greece can unilaterally restructure its debts if things get bad, which makes their creditors nervous. I don’t think CA can do so, presumably if they tried someone would take the State to a federal court, which would probably tell them to suck it up and raise taxes to pay off their loans.
I agree with Simplicio. California’s deficit is not that big, and the state constitution mandates that bondholders be paid before all other obligations except schools, so there’s little real risk of default.
It’s not just the current deficit, Greece has a national debt (IIRC) of something like three times its GDP. Meaning that even if they could balance their budget, they’ll need to run large surpluses for decades to pay off the debt. California doesn’t have anything like that.
No, it is 115% of GDP. (Cite from IMF.) That’s bad enough. California, like all states, must balance its budget every year, so while the deficit is bad, and is being handled by tricks, it is nowhere close to Greece.
115% isn’t necessarily a horrible national debt. Japan’s national debt is about 200% and it’s not causing them any short-term problems. They still have a strong, investment-grade credit rating. The reason it’s so crippling for Greece right now is because they also have a yawning deficit and a lot of their national debt is in short-term loans, and needs to repaid soon on pain of a sovereign default.
And, if I’ve understood correctly, I think the thread answers my questions: California is not in the same straits as Greece because its deficit is miniscule in comparison (1 or 2%, as opposed to 13%), and its debt as a percentage of its economic output isn’t as high in the first place. On the other hand, the reason it’s been getting as much attention as it has is because, while its deficit isn’t crushing in itself, its state politics is going to make it a lot harder to deal with. Right?
Isn’t a main difference that a sovereign country can choose to default on its debt, with no legal recourse for its creditors, when it’s merely too onerous to pay them, while a sub-national entity like California can always have its assets seized?
Yes. The gridlock in the legislature, and the 2/3 rule for new taxes, has made a bad situation worse. Hpwever public employment in California is nothing like it is in Greece, and no one has rioted yet (outside of the universities) for being furloughed.
As for Greece vs Japan, Krugman has been making the point that a country like Japan can devalue its currency and thus make its products more competitive, which increases exports, decreases imports, and thus improves the employment picture. Greece, as a member of the Euro Zone, can’t do that, and is stuck.
I have a silver lining - my daughter is going to spend next year in Germany, so we might buy some cheap Euros soon.
I would also assume that California has areas in its economy that can be expected to do well. To my knowledge (which may just be out of ignorance) Greece doesn’t have an area as dynamic as, say, Silicon Valley.
I’m not an expert here, but I don’t believe a US state can have its assets seized. Moreover, several states have defaulted on their debts in the past. From here (PDF):
The boom years of the early 1830s were followed by a financial panic in 1837 and the
onset of a prolonged deflation and depression in 1839. In 1841 and 1842, eight states and the territory of Florida defaulted on their debts. Florida and Mississippi repudiated all of their debts, while Louisiana, Arkansas, and Michigan ultimately repudiated part of their debts. Pennsylvania and Maryland were the first to resume payments and repaid essentially all of their obligations. Indiana and Illinois negotiated with their creditors, and repaid most of their debts.
Here is what Paul Krugman had to say on the subject:
When you can’t pay off your debts you only have a few options. You can cut your budget which will hurt a lot of people dependent on government help. You can raise taxes, which most people say would prevent an economic recovery. The most popular option is to devalue your currency to promote an economic recovery. But because Greece doesn’t have it’s own currency it can’t do that. So it’s left with making severe budget cuts unless some other country gives it money, or the European Central Bank devalues the Euro.
If Europe did not help Greece out it’s only two options would have been to accept budget cuts or leave the Euro.
California can’t devalue its currency either, but Washington will always be willing to help Californians unlike the other countries in Europe are willing to help Greece.
California is a sub-national entity, its ability to blackmail Washington is very limited, as opposed to a nation-state like Grecee’s hold over a jumped up common market and Customs Union like the EU.
What? Greece in itself has no ability to blackmail countries like Germany or France whatsoever. They don’t have any major obligations to the Greeks and the German and French people are fiercely opposed to bailing them out. The main reason the Eurozone has had to throw Greece a lifeline is not because the Greeks are in trouble per se, but because German, French, Dutch and Spanish banks are its principal creditors. If Greece defaults on its debts, German and French banks lose a ton of money, and if Spanish banks take a big hit that could tip Spain into a similar crisis. There’s also considerations about the effect it could have on the Euro of course. Either way, it’s pure self-interest for the rest of the Eurozone to help them out, it’s not blackmail.
Washington, on the other hand, has mandatory federal commitments to spending in California on Medicare, unemployment benefits, and so on.
I don’t think you can compare the % of GDP with the % of GSP. A national government naturally absorbs a larger percentage of the nation’s economy than a state government of a state’s. CA’s state gov doesn’t have to perform all the functions of a national government (or those of a county or municipality either). As a measure of how fiscally sound they are, it’s a completely invalid comparison, IMHO.
