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.

Second, the problem to a significant degree is the consequence of federal government policies over the long term. The cumulative effects are now enormous, and much exacerbated by the current recession and attendant revenue shortfalls, but they are not new.

For example, the Washington based Center on Budget and Policy Priorities issued a comprehensive report in 2004 which was remarkably prescient in forecasting the current very serious state budget problems. A number of factors were highlighted, including laws restricting state capacity to collect taxes, federal tax cuts which also reduce state revenues, and the growing Washington trend of imposing expensive mandates with no offsetting grant or other income.

Examples include the U.S. Internet Tax Freedom Act of 1998, which reduced state sales taxes, Bush administration tax cuts designed without consideration of impacts on states, and the No Child Left Behind Act of 2002, which greatly expanded testing and record-keeping responsibilities of states, with no compensating income.

Newspaper editorials as well as political speeches often generalize about government waste and excessive spending by politicians who just can't say no. As usual, reality is more complex, including the basic political point that we all tend to regard our own interests as the public interest — pressure group politics is what the other guy does.

The proposed prison cooperation between California and Michigan is reflected in other public policy initiatives. For instance, Democratic Gov. Jim Doyle of Wisconsin and Republican Gov. Tim Pawlenty of Minnesota have established a partnership to control costs through joint purchase and distribution regarding food, fuel, transportation and other expenses.

The U.S. has relatively few examples of effective long-term regional cooperation, reflecting the great established power of individual states in our federal system. One exception is the Tennessee Valley Authority (TVA), a very successful New Deal innovation to provide basic electric power to poor rural areas.

With politicians constantly comparing the current recession to the Great Depression, and a new Democratic administration in Washington, this is precisely the time to take some risks of a regional TVA variety.

Arthur I. Cyr is Clausen Distinguished Professor at Carthage College in Wisconsin and author of “After the Cold War” (NYU Press and Macmillan). He can be reached at acyr@carthage.edu