What if a governor, to sharply reduce an endemic $20 billion deficit, refuses to pay the loans? For perspective, I talked to Joseph Salerno, who teaches economics at Pace University in New York and is a senior fellow of the Mises Institute, a think tank in Auburn, Ala. He has studied and written about government debt and possible repudiation, for example on Argentina.
“First of all, you wouldn’t get any more loans,” he said of the state government. “That would be good discipline. You would have to sell off assets to fund current programs. You could bundle up a lot of the assets and just sell all of them off. The state could make deals with creditors.”
Something similar is happening in Greece, which is selling some of its islands to avoid defaulting on its loans. But in April, Schwarzenegger announced that previous plans to sell some state assets would not include an extensive sale of state-owned buildings. A debt repudiation could force such sales.
Salerno continued that debt repudiation would “reduce the burden on taxpayers to cover the interest payments,” saving, as noted, debt payments of $5.5 billion a year now, and even more in the future. “It would improve the business climate in the state” because government would be smaller.
Another benefit, he said, is that the state would not be able to fund expensive projects such as the California High Speed Rail, being paid for by a $10 billion bond voters approved in November 2008, just as the economy was imploding. Today, it’s unlikely such a bond would pass. The rail also has been criticized as a boondoggle.
Indeed, the governor and the Legislature just voted to pull from the November 2010 ballot a bond measure of a similar amount, $11 billion for state water projects. According to Ballotopedia, the measure was postponed to November 2012. The debt cost of this measure, as well as of the train, would be about $800 billion to the general fund.
Well, as a California property tax debtor, let me say, right on!
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