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Monday, May 14, 2012

California Fiscal Policy: The Crowding-Out Effect

In the U.S. Constitutional Convention of 1787, some delegates expressed the concern that giving the General (federal) Government the authority to tax income would eventually result in a “crowding out” of the ability of state governments to raise revenue. Over two hundred years later, in 2012, California had cut its budget by 20 percent over the previous three years and was still faced with a $16 billion deficit. Unlike Greece, California cannot avail itself of bailout funds from the federal level. Additionally, the Federal Reserve, like the European Central Bank, is barred by statute from bailing out a state government. Even as the U.S. Government places certain requirements on California’s budget that make it more difficult for the Government of California to make cuts, it could not avail itself of the bailout (TARP) that had benefitted Wall Street banks and the Michigan auto industry.

The complete essay is at Essays on Two Federal Empires.