CA's budget crisis could affect U.S. economy

July 1, 2009 7:36:42 PM PDT
California is not the only state facing a fiscal crisis at this time. Budget talks have completely broken off in Illinois, Pennsylvania is at an impasse and may not be able to pay its workers, and temporary budgets have been approved in Ohio and Connecticut. Indiana, Mississippi and Arizona, narrowly approved spending plans overnight.

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The California budget crisis could have national implications. Of all the states, California has the biggest economy and it also has the biggest budget crisis. What that means to the rest of the country is just now beginning to sink in.

Earlier this year, Treasury Secretary Tim Geithner suggested the Federal government was willing to lend a hand to California, but two weeks ago the president's spokesman said no.

"We'll continue to monitor the challenges that they have, but this budgetary problem unfortunately is one that they're going to have to solve," says White House Press Secretary Robert Gibbs.

Tuesday Senator Barbara Boxer, D-Calif., said stimulus money is coming but some of it will depend on California having a budget.

"And we are assuming that the state will get its act together because under the Constitution it must get its act together," says Sen. Boxer.

But the state hasn't yet and the question being asked in Washington can the U.S. economy recover without California.

"I think this is starting to be on the radar screen. There was an op-ed piece in the Washington post about it," says ABC7 political analyst Professor Bruce Cain, Ph.D.

But Professor Cain says so far there is no indication the president is considering a federal bailout of the state.

"The chickens have come home to roost and so we do need to deal with it," says John Grubb, with the Bay Area Council who represents business interests.

Grubb says the state and local government spending is somewhere between 10 and 20 percent of the state's economy; and that's about two percent of the national economy.

"In that large of an economy a two percent decrease can have a pretty serious impact, but it doesn't sound very big," says Grubb.

So the question becomes will the state's budget crisis pull down California's overall economy? And if it does will the white house step in.

"At some point it could force the hand of the Obama Administration if in fact the California economy goes into a serious crisis," says Cain.

But that hasn't happened yet and polls show not even California voters are paying much attention.

"And I think a lot of this is like the boy who cried wolf over and over again," says Cain.

It seems every year the state has a budget crisis and a last minute fix.

"My guess is people still don't believe it's real because they've heard the rhetoric before," says Cain.

This year however, there no easy fix. California's legislators aren't feeling much pressure from voters to reach a compromise, and when voters start feeling the pain, that might change.

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