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Real-World Consequences Of The Meltdown

by: David Dayen

Fri Jan 09, 2009 at 14:20:13 PM PST

Look around you and you probably know somebody who had been affected by the economic slowdown, particularly here in California.  Maybe it's someone you know in the construction industry:

State Controller John Chiang refused to make payments Thursday to contractors for work done on more than three-dozen public-works transportation projects. The action, the first of what are likely to be a series of blocked payments, was prompted by the state's unprecedented budget shortage.

The move was required by the Pooled Money Investment Board, which on Dec. 17 ordered a halt to the payments to projects financed with a mix of voter-approved bond funds pending a resolution of the state's fiscal dilemma [...]

The projects are all being handled by Caltrans, which has objected to cutting off the money to the contracts. Some $33 million and 39 public projects are affected.

(It's hilarious that the Governor objected to this after his own Finance Director voted to shutter all infrastructure projects a few weeks ago.  Did he not know that this would be the result?  Another Santa Claus Republican.)

Or maybe it's that friend of yours who doesn't have any health care or the ability to pay for treatment, or that other lady you know who works at the hospital:

California hospitals are threatened. With only 1.9 hospital beds per 1,000 population,3 the state's residents are being placed at risk by the negative impact caused by inadequate Medi-Cal payments and California's faltering economy. Currently ranked 49th nationally, hospital bed availability is likely to contract further in this environment, diminishing access to health care services even more. As a result of low Medi-Cal payments, the majority of california hospitals have already made cutbacks or anticipate reducing services, including closing subacute units and psychiatric units; eliminating skilled nursing beds and ER beds; reducing cardiology, obstetrics and other clinical services; and laying off staff or reducing pay.

The impact of the economic downturn is evident. Hospitals report a 73 percent increase in consumers having difficulty paying out-of-pocket health care costs, and 33 percent report an increase in ER visits for uninsured
patients. With the growth in unemployment, hospitals are experiencing the effects of more californians without job-based insurance. in fact, hospitals report a 30 percent decrease in volume for elective procedures - one of the few areas that provide hospitals an opportunity for revenue growth. In addition, the capital markets are providing a significant hurdle for many california hospitals. More than 25 percent report the inability to access financing for construction, remodeling, equipment purchases or working capital.  This has resulted in 41 percent of hospitals halting construction projects or equipment purchases. This has a significant impact on the state's economy and jobs.

Or maybe your neighbor has a son or daughter who wants to go to college.

The University of California system may cut the number of in-state first-year students by 2,300, or 6 percent, as the recession squeezes the budget.

The proposal to reduce enrollment for the 2009-2010 school year, as well as a plan to freeze 285 salaries of administrators, will be presented Jan. 14 to the Board of Regents by President Mark Yudof, the Office of the President said today in an e-mailed statement. The system, based in Oakland, has 220,000 students on 10 campuses.

As an aside, health care and education were the only two industries to INCREASE jobs in today's dismal employment report.  Here in the Golden State, we are going in the opposite direction.

The failure of leadership over the last decade at all levels of government is now coming due.  We are not prepared - nor are we taking seriously enough - the magnitude of this meltdown on the state of California.  We are about 3-4 weeks away from the state sending out IOUs.  That's functionally bankruptcy, and the trickle down of that will be fast and painful.  Everyone in the state will either be affected or know someone close who is.  

California's dysfunctional government has finally caught up to itself.  The general lack of urgency about this is stunning to me.

Good thing an old-politics hack like John Burton will lead us out of the abyss!

...let me add state employees into the mix...

California will close most state offices on the first and third Fridays each month starting in February, padlocking DMV outlets and other services while reducing state worker pay to help survive a massive budget problem, according to a state Department of Personnel Administration memo.

Only offices deemed critical, such as state hospitals and prisons, will remain open under Gov. Arnold Schwarzenegger's twice monthly furlough plan.


David Dayen :: Real-World Consequences Of The Meltdown
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Media masks it (0.00 / 0)
They focus on tax increases and while people fret about $100 or $200 they aren't shown the far more costly and devastating impacts of these cuts.

Further, these cuts haven't yet clearly challenged middle-class suburban prosperity. Those folks can still argue that the only folks suffering from those cuts are the "undeserving poor". The cuts WILL challenge that prosperity, but until the pain gets deep, the cuts won't get that kind of attention.

You can check out any time you like but you can never leave

We did it!! Government's drowning in the bathtub!! (0.00 / 0)

How much do you want to bet Dems will capitulate at the very last second and essentially destroy all state-funded programs to be "responsible"?

Which side of that bet am I on? (0.00 / 0)
Because I will bet against the Dems every time, based on past track record -- the most generous interpretation is that they don't want to be part of destroying the state completely, so they'll cave to the Republican anti-government demands.  Again.  And Again.  And Again.

[ Parent ]
bankruptcy (0.00 / 0)
  Democrats still don't get it.  Republicans want to bankrupt the state--like Vallejo, once in bankruptcy, all the union contracts and pensions plans are open for negotiation (which means cuts).   The only question I have is whether Schwartz will blink and sign the Democrats majority-rule budget fix or whether he'll let the state slide into the abyss.  My guess is that his Teutonic upbringing will win out and he'll decide, like the Fuhrer, that California was not worthy of his genius and he'll let California slide (metaphorically) into the sea.

taking the cyanide pill (0.00 / 0)
seems like a possible scenario for Der Gobnor.

Yes, this is the Yacht Party's greatest dream realized, and they hope we'll have to liquidate state government after the bankruptcy shakes out.  Even man for himself!  John Galt uber alles!

[ Parent ]
That is exactly it (0.00 / 0)
Bankruptcy is their shock doctrine - the only way they can push through the massive gutting of government, from privatization to rolling back 40 years of environmental law to 70 years of labor law to outright ending of programs that provide prosperity.

And let's make no mistake - Arnold is as much a part of that effort as anyone.

You can check out any time you like but you can never leave

[ Parent ]
I think the ugly wakeup call for most suburbanites (0.00 / 0)
is going to be when the state is forced to cut all funding to UCs and CSUs, and college goes from being expensive for their kids to utterly unaffordable; or when their kids' high school can no longer afford textbooks.

Really, that's already here (0.00 / 0)
This is only going to make it worse.

Compared with a generation ago, a college education at the state schools is already unaffordable for a lot of Californians and their families.

[ Parent ]
The CSU, for the first time, is cutting enrollment across the board. (0.00 / 0)
The CSU is the road to the middle class for immigrant families (or was, when there used to be a middle class).  These are cruel, cruel cuts.

[ Parent ]
Just *how* big is state and local government (0.00 / 0)
In all the discussion nationally about the Obama Administration's economic stimulus plan, I haven't heard a lot about a very simple reality of our federalized system: a lot of government spending is not under federal control, and a cut in local government spending or state government spending has the same negative effects as a cut in federal spending right now.  And any spending increases on the federal level that are balanced by cuts at the state and local level don't improve the situation; they only prevent it from getting worse.

It's been a very long time since I've seen realistic numbers for the US economy.  So I'm hoping some of you have seen recent numbers.

For the "G" of the basic macro economic accounting equation (Y = C + I + G + ...), how much of that is the Federal Government, and how much of that is State or Local?

This is critical to know, and critical to publicize if it turns out that state and local spending are very large compared to federal spending.  And I'd guess that they may very well be very large.

Somebody know what the numbers are currently like?

Found some rough figures (0.00 / 0)
After raising my question, I consulted the oracle, and saw what I could find quickly.  Google deigned to answer some of my questions.

Here are Fiscal 2009 estimates from GovermentSpending.com, in trillions of $:

Federal Government   10,385.9  
State Governments     1,051.5	
Local Governments     1,531.6
Gross Gov't Spending 12,969.0

So federal spending accounts for about 80% of government spending.

Our $40B deficit amounts to around 1/3 (!!) of the expenditures (figures here).  So if the GOP gets its way, we are talking about that much getting cut.

We are an extreme case, but if we assume that states on average need to cut 20% unless they get aid, the we are talking about roughly a half a trillion dollars of budget cuts at the state and local level that the feds would need to counter balance just to keep things from getting worse.

I'm assuming that some piece of this is getting accounted for in the federal plans, but since I haven't seen these figures laid out this way myself (and I'm surprised at their size), I figured it might make sense to lay these out.

This is my quick back-of-the-envelope calculations, and IANAE.  Anybody see any serious errors in my logic here?

[ Parent ]
budget (5.00 / 1)
This is ridiculous.  The GNP of the US is about 15 trillion--Federal tax receipts are (or were) around 3 trillion.

[ Parent ]
Do you know where there are better figures (0.00 / 0)
The Government Spending site is, therefore, useless.

I'm looking for estimates on the core national income accounts used in the Keynesian expenditure equation.  Do you know where I can find those?  

[ Parent ]
Yep. Read from the wrong row (0.00 / 0)
The figures I have there are from the gov't debt line.

So here are the corrected figures (same site, right row)

Federal         3107.4
Transfers       -498.6
State           1303.6
Local           1640.1
Total Gov't     5552.4
GDP            15027.0

Of the state figures, CA's state expenditures are about $111B, or about 8.5% of all state expenditures.  But this does improve my general point.  Let's assume that all of the transfer payments go out of the federal budget for simplicity. Then state and local are more than 50% of total government.

So Obama now has to match state and local cuts at least dollar for dollar, just to keep things from getting worse.

Assuming that state and local government cuts only 10%, we're talking almost $300B in cuts the feds will need to make up.  If things turn out to be more like California, then we could be talking a $600B gap, or more.

Obama's talking only $800B - $1000B in total so far.  Does not sound to be nearly enough.

[ Parent ]
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