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California Will Be Bankrupt Before General Motors

Even with failing automakers, Michigan's economy looks pretty strong compared to the Golden State's.

by
Ronnie Schreiber

Bio

January 3, 2009 - 12:00 am

Turkey was once known as “the sick man of Europe.” Michigan fills a similar role in the minds of many Americans, a basket case of a state on the edge of a financial precipice. This has been the popular view of Michigan for at least 20 years, since Michael Moore’s “documentary” Roger and Me portrayed Flint as devastated by GM’s efforts to modernize the giant automaker.

Michigan’s image is that of an economic disaster zone, filled with decaying cities, greedy unions, stupid companies, and general incompetence. Many city and county governments are distressed financially, and the business climate is, to say the least, not improving. The city of Detroit is deeply in the red, has failing schools, and has the highest unemployment and poverty rates in the country; entire swatches of the city are turning into urban prairie with foxes, coyotes, and other fauna. Among conservatives particularly, the state’s image is that of a solid blue Democratic bastion of high business taxes and intransigent unions, whose businesses now want to violate free market principles instead of failing according to capitalism’s theory of creative destruction. Political liberals with their environmental sympathies aren’t much friendlier. During the recent congressional hearings on aiding the automakers, both sides of the aisle got their licks in.

The truth is that despite the doom and gloom Michigan is a well-run state, financially and otherwise. Republicans have held the governor’s mansion for 32 years out of the past 45 years, and if Michigan conservatives and libertarians hadn’t supported term limits John Engler would still be governor. Republican George Romney, Mitt’s father, was the driving force in rewriting Michigan’s constitution, which has required a balanced budget for the state since 1963. Regardless of which party is in power in Lansing they have to be fiscally responsible with the state’s books.

That’s why despite Michigan’s troubles it’s not nearly in as bad fiscal shape as most other states. Twenty-nine states have worse projected 2009 budget shortfalls. Budget gap as a percentage of the general fund finds Michigan in 43rd place. Things are projected to get worse in 2010 when Michigan will be $1.6 billion in the red, but that will still be no worse than 35th as a percentage of the budget. Things may be bad here economically, but in general the state government is fiscally responsible. While there are structural, political, and economic issues facing Michigan, the state is nowhere near the crises faced by California and dozens of other states. California is looking at a $36 billion shortfall in 2009 and New York state an estimated $15 billion, an estimate that keeps rising every day as the layoffs on Wall Street start impacting state revenues. Twenty percent of Americans live in those two states. It’s not just the large states. Arizona faces a $3.1 billion budget shortfall, a 30% gap, and similar situations can be found across the country. Perhaps pointing their fingers at the domestic automakers’ problems or tsk-tsking about Michigan allows other Americans to avoid facing their own states’ financial irresponsibility.

Michiganders aren’t stupid or incompetent, and while our businesses and unions may have made mistakes, at least the state government has been managed well. Our state tax dollars may not have had the best return on investment but because of the balanced budget requirement, for 45 years through good times and bad, Democrats and Republicans have had to keep the state’s books in order. Unlike many states Michigan unfortunately has had a lot of experience dealing with economic downturns. There have been four major national economic recessions since 1963. When the country is in recession people buy fewer cars. That impacts Michigan’s major employers, their workers, and the state budget. In every recession that budget has been adjusted and balanced accordingly. Though the current recession is perhaps the worst since the Great Depression, I’m convinced that while painful cuts will be made, Michigan will get through this downturn better than many other states.

Californians buy mostly foreign-branded cars. When they say “nobody buys American cars,” from their perspective it’s mostly true. Their politicians complain that the Detroit car companies are litigating California’s stricter state emissions standards. There is little love for the Wolverine State on the west coast. Through their state government, though, the people of California have almost as much debt as General Motors. The state government isn’t the only irresponsible party there. Cities large and small are starting to declare bankruptcy, unable to meet obligations for overly generous public employee pensions. California residents are not much better money managers than their elected officials, with one of every 218 households in foreclosure, 30% higher than Michigan’s foreclosure rate. With four times the number of Michigan homeowners in foreclosure it’s quite possible that California’s total debt, public and private, exceeds that of Michigan, including the automakers.

General Motors owes billions of dollars. If GM fails and is liquidated, those creditors will end up with pennies on the dollar, but at least the automaker has assets that can be sold to fund those payouts. If California and its cities default on their obligations will they sell off the Golden Gate Bridge or Big Sur to satisfy holders of municipal and state bonds? The first installment of the loan package for GM and Chrysler crafted by the Bush administration will tide them over until March. Interestingly, March is also when California will run out of money if Sacramento can’t agree on tax hikes and spending cuts. It’s entirely possible that California will go bankrupt before GM.

Ronnie Schreiber opines about cars at Cars In Depth and other automotive web sites.
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