California's recent history is the nation's in microcosm (a really big microcosm). Spending has simply outpaced revenues. As long as credit was easy and relatively cheap, borrowing was far more attractive than either cutting spending or raising taxes. This approach to fiscal matters has taken a beating recently. The recession has meant falling revenues and the collapse in the credit markets has made borrowing much more costly.
CBS News reports:
Between the 2004 and 2008 fiscal years, total state spending increased by around 44 percent, far outstripping tax revenues. Debt has tripled in six years. All this is true even though Californians enjoy one of the heaviest income tax burdens in the nation.So now what? McArdle argues for cutting California loose and letting them go bankrupt, even though she doesn't think this is likely. It is possible that we could see a bailout of California by the federal government.
California's particular brand of fiscal insanity combined self-imposed spending mandates with self-imposed restrictions on raising revenues. It would be exceedingly difficult to argue that Californians were deserving of a bailout. Perhaps the only argument that could sway many is the claim that California's failure would be detrimental to the health of the nation as a whole. That may be true, but it is also the case that, in the long term, it is not clear which would be worse, bailout or bankruptcy.