U.S. states' fiscal crises are national — and international

California is enormous in global as well as national terms. The largest state economy is also eighth largest among nations in the world. In consequence, the implications of a fiscal collapse in the Golden State are distinctive, with the potential greatly to increase the already severe global economic recession.

Asia's stake in California especially, and the West Coast and Western states generally in the U.S., is particularly great. Los Angeles is a principal port for the entire world, but especially the Pacific region. The growth of generally more open trade over the past half century has been remarkable, spurred by trade agreements staring with the Dillon and Kennedy Rounds in the late 1950s and early 1960s. Nonetheless, U.S. states have considerable freedom to encourage or discourage specific firms and sectors from buying, selling and investing in their part of the country.

Financial default is an imminent prospect in many states, especially given the importance of the June 30 date as the end of many fiscal years. In Illinois, for example, legislators have rigidly refused to approve an income tax increase proposed by new Gov. Pat Quinn. Analysts predict Illinois inability to pay bills starting in July.

This challenge is national in scope and development. First, at least forty-four of the fifty states face budget shortfalls. Here California provides some hope. Thanks to the start of economic recovery, plus spending cuts already implemented, the state deficit has been reduced to an estimated US$24.3 billion from US$42 billion at the start of the year.

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