The president of Europe’s Central Bank was asked in January whether Greece posed a threat to the monetary union. He replied that the crisis in Greece was greatly overstated and told reporters that if they wanted to worry about something, they should worry about California.
Right now, Greece is synonymous with an economic red alert. Without a bailout, the entire country could face debt default. Standards of living are plummeting; unions are already staging mass strikes, and money is fleeing the country.
Is it possible California—the seventh-largest economy in the world—could actually be in a more dangerous situation? Could California set off a Greek-style economic crisis in America? Some say yes.
Too Much in Common
In some ways, Greece and California are very similar. Both have high unemployment and falling tax receipts. Both also have bloated public sectors with lavish retirement and pension plans that are underfunded and unsustainable. Both have gridlocked governments comprised of politicians incapable of working together to make hard choices.
Greece and California are also members of a larger union that shares a common currency. Each state also has specific trade relationships as well as financial interrelations with others inside the union. And both states have the worst credit ratings within their unions. As with Greece, it costs more to insure California debt against default than it does to insure Kazakhstan.
Both Greece and California are dominated by special interest groups and handicapped by unions. Chronic overspending has become endemic and uncontrollable in both locales. And both states are bankrupt.
Critics of the economic doomsaying point out that there are big differences between Greece and California. There are differences, but not all of them are good. In some ways, California could actually be a greater threat to its union.
California’s debt is supposedly far less than that of Greece. California’s debt reportedly equals about 7 percent of its economy. In Greece, the ratio is around 100 percent. On the surface, Greece looks much worse off.
In reality, comparing total California debt to total Greece debt is like comparing rotten apples to rotten oranges. To make it a fair comparison, you also need to factor in California’s share of the national debt (which is projected to be $14 trillion by year end). When this amount is factored in, the $68 billion that the state owes (as of the end of 2009) balloons to $1.65 trillion—which means that California’s actual debt-to-gdp ratio is almost 90 percent.
Yet, as horrendous as a debt-to-economy ratio of 90 percent is, California’s ratio is even greater. When including unfunded Social Security, Medicare and Medicaid liabilities into the equation, California’s state debt-to-gdp ratio soars to a stratospheric 400 percent.
That means California debt equals more than $200,000 per man, woman and child. Where will the money come from?
A California debt default would be far more damaging to the U.S. than anything a Greek failure could produce. Besides being far smaller, Greece’s economy makes up only 3 percent of the total eurozone. California, however, composes about 12 percent of the U.S. economy.
Plus, a California default could disproportionately hurt many U.S. states. According to the ecb president, Jean Claude Trichet, cumulative U.S. state budget deficits amount to 12 percent of America’s gross domestic product. In Europe, the figure is only 7 percent.
Looking in the Mirror
Portugal may be a problem. But so is Ohio. Think things are tough in Ireland? Look at Kentucky. Is Spain having unemployment issues? So are Florida, Illinois and Michigan. While analysts focus on Greece, they are missing the rhinoceros in the flower garden.
David Walker is the former U.S. comptroller general, which means he was America’s top auditor. He says America only has a couple of years to deal with its deficit problems before it ends up like Greece. America could face a “crisis of confidence with regard to our own finances” if we don’t start being honest with our budgets, he says. Walker, who is now working to bring attention to America’s financial irresponsibility, warns that a big part of America’s problem is its use of “creative accounting practices”—the same ones that burned Greece.
Events in Europe surrounding Greece are pivotal, and could have dramatic economic and geopolitical ramifications (article, page 2). But when comparing Greece and California, don’t forget that California’s economy is five times larger. The EU could survive without Greece, but America will not survive without California.
Unfortunately for California and the rest of America, watching the Greece crisis is rather like looking in a mirror. ▪