President Obama will meet with Greece’s prime minister George Papandreou today to discuss Greece’s economic problems. Some experts worry that Greece’s debt crisis could have a domino effect on other nations – including the U.S. – similar to the 1997 Asian Financial Crisis.
Yet the domino effect of California defaulting on its debt would have a greater impact on the U.S. than Greece defaulting, according to the CEO of JP Morgan Chase.
California’s problems primarily stem from over-spending. This year, California is expected to spend $179.9 billion – double what it spent just 10 years ago. Yet, California’s economy grew by just over 50 percent during the same period. Today, California faces an estimated deficit of $20.7 billion.
The state’s Legislative Analyst Office (LAO) predicts the budget gap will widen for at least two more years. The LAO expects the gap to begin shrinking by 2013 but only if the state’s economy substantially recovers.
Every year that California runs such deep deficits, the state compounds its problem. As a percent of the budget, it took twice as much to pay the interest on California’s debt in 2008 than it did in 2000. Paying interest on debt, or “servicing the debt,” will cost more as the risk of California defaulting on its debt increases.
Governor Arnold Schwarzenegger and California lawmakers have been struggling to create a budget that reduces spending while still complying with the state’s many peculiar budget rules. Some citizens are protesting proposed reductions in spending. For example, a group of students and teachers held a “Day of Action” with rallies and demonstrations to oppose cuts in education spending and increases in student fees. (Fortunately, the rallies aren’t nearly of the same intensity as the violent protests in Greece.)
Yet polls indicate that Californians recognize the need for cuts in spending. A Field Poll found that half of voters surveyed support using spending cuts mostly or entirely to close California’s deficit. Just 13 percent – or one in every eight voters – thought tax increases should be used to close the deficit.
As the situation in Greece has the world worried about a domino effect of debt crises, California provides an unwelcome preview of what other states and the U.S. federal government will face unless they reign in deficits.
