Many people are comparing the current Greek sovereign debt crisis to the fiscal crisis in the state government. In 2009, California state controller John Chaing was forced to issue IOUs due to dwindling cash reserves. There was considerable doubt as to whether California can sell bonds to finance its way out of its cash crisis. Candidate Meg Whitman is making substantial headway describing the problems in California.
Many warn the California will become the American version of Greece or PIIGS (Portugal, Italy, Ireland, Greece, Spain). In 2010, California has a $20 billion budget deficit. Counties and cities are cutting deep. The CalPERS and CalSTRS pensions may be severely underfunded even though taxpayers will have to foot the bill no matter what happens on Wall Street. The 1000 point drop in the Dow is a reminder of how fast the California pension situation could get worse. However, all of these fears are completely overblown when we compare the difference between Greece and California.
Let’s start with Greece. The black market is 30% of Greece’s economy (EUR 70 billion). The tax authorities in Greece are among the most incompetent in the world so tax evasion is the most popular Olympic sport in the country. The people in government are corrupt beyond belief from the very top to the very bottom. The Greek public sector employs many citizens with bloated salaries (14 months a year) and pensions. Government employs many in public monopolies with many non-governmental activities such as casinos, trains, hotels, and electric power. Many of these businesses lose money like the trains (EUR 1 billion per year). For example, the train system loses 1 billion per year. Aside from government businesses, they spend generously in many areas such as EUR 300 million to the Greek Orthodox Church, EUR 250 million to radio and TV, and EUR 300 million to support sports. There is so much fat that they could cut a lot from the budget and sell their businesses to reduce their debt load.
One final note about Greece. They are protesting the IMF and the European Union, sometimes with violent results. But there are no protests for the tax evaders (mostly small and medium businesses). There is no Tea Party movement. There is no movement against bloated public pensions and salaries. The Greek people feel entitled to their benefits, but with little to no obligations or responsibilities. Californians and Americans are the complete opposite. That’s why California will have a much better outcome.
In California, the state exports technology from Silicon Valley, movies from Hollywood, tourism, and agriculture. Because state residents export goods others want, they are able make money without reliance on government employment to pay federal and state taxes. Many Internet companies make their home in California including the biggest one, Google. Employers in California, including Google are hiring and not just in retail jobs. In general, Californians don’t cheat on their taxes, so there is no worry about a black market or unpaid taxes.
Washington DC gets a lot of tax revenue from Californians. California supports Washington DC, not the other way around. Sure, they have to pay some back to California in the form of social security, Medicaid, and welfare, but it’s a much more even trade than in Greece. Germany voted to provide a bailout to Greece but Athens doesn’t pay one Euro to Berlin. Athens is receiving way more from Brussels than it is giving.
The whole point is this: California is not bankrupt. California is very rich. If California had a fair tax system which requires everyone to pay their fair share of taxes [eg. property owners (modify Prop 13) and oil companies (stop making offshore profits tax free)], California could get out of its budget mess very quickly and fund its pension obligations adequately. California does not need to leave the US dollar, devalue its own currency to sell its products, or attract more tourists. California needs to get more than $500 from property owners who have never sold their house since Prop 13 came into effect. They are just as guilty of freeloading as the Greeks.
So the big question is, will Germany support Greece like Washington DC is supporting California? Germany is the world’s second largest exporter and does not need a currency devaluation to kickstart their economy. How long will Germany subsidize Greek debt? What does Germany get for supporting Greece? A lot less than what Washington DC gets from California. So will Germany support all bets that the big banks made on Greece just like the United States used the Federal Reserve’s balance sheet to subsidize the bets placed on insurance written by AIG?
Washington DC may hesitate a little, but DC will support California because it provides so much economic activity to the country.
California may be in trouble, but Greece is in far worse trouble.