Is California the State Closest to Economic Ruin?

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Lucy Nicholson / Reuters

An unemployed man looks for a job in sales or customer service at the Goodwill Job Center in Los Angeles

Arnold Schwarzenegger may believe that he would be sitting in Barack Obama's chair in the Oval Office if only he had been born a U.S. citizen. Instead he runs California, which may be the nation's most populous state while being at the same time the one closest to economic ruin.

California had an unemployment rate of 9.3% as of December. That news is days old now so it has very little value on its own.

What may end up being novel about the California jobless rate is how quickly it might be reversed by the capital, which will be injected into the economy by the new federal stimulus package. This state may end up being a sign of things to come. The foreclosure rate in California is one of the highest in the nation. More than 236,000 homes or 2.8% of California's housing stock foreclosed in 2008, helping to drive down home prices by 42% from December 2007 to last month, according to Bloomberg. In addition, the state government is projected to run a deficit of $40 billion over the next two years. (Read "Four Steps to Ending the Foreclosure Crisis".)

Writing about the possible effect of the $825 billion federal program, The Los Angeles Times reports that "The House bill, which is likely to be voted on next week, would bring the state more than $11 billion in health care and education money that could go directly to reducing the deficit through mid-2010." Additional funds would come into the state for building highways and other transportation infrastructure.

Based on the theory that $825 billion can buy or save three million to four million jobs, at least 200,000 of those should be in California. If this unprecedented economic package works, foreclosure rates should diminish and home prices should stabilize.

The persistent criticism of the administration's plan to revive the economy is that the money goes into the system too slowly. It will take months to get capital for large infrastructure programs from the Treasury to the private enterprises that have to do the work and hire the people. In regions where enough workers are not available to carry out some of the plans, the people may have to relocate to fill the jobs. The soft underbelly of the plan is its logistics.

California may be the best example to illustrate why the stimulus package will be "slow acting". It has among the highest unemployment rates. The infrastructure programs available for California would include broadband expansion, IT enhancement, and energy grid enlargement. The regulatory environment in California has always been strict. Almost all the federal government stimulus packages will require approval, likely from multiple bureaucracies in this state. This alone means that the economic crisis in the Golden State cannot be mitigated in any serious way until well into 2010.

See pictures of the global financial crisis.

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