California’s debt, currently around $1.6 trillion, is poised to soar in the coming years. Bank on it, though don’t be so simplistic as to blame the debt surge on Governor Gavin Newsom, or his eventual replacement in Sacramento.
Evidence that California's debt will rise no matter who is governor is all around us, and it prominently revealed itself in the past week alone. In concert with media reports indicating that San Franciso-based Databricks has achieved a valuation of $100 billion, it was announced that the next funding round for San Francisco-based OpenAI would value the former non-profit at $500 billion.
It’s a reminder that the true driver of the Golden State’s growing debt has little to do with the state’s left lean, and most everything to do with the fact that it’s populated by the most enterprising and productive people on earth. Precisely because the State of California has taxable access to such entrepreneurial people, it’s able to borrow with ease. Yes, California’s debt is an effect of the density of billionaires and soon-to-be-billionaires in the state. They’re showering Sacramento with enormous tax revenue now, and much more perilously, they’ve only just begun to feed the spending and borrowing ability of California’s political class.
All of what’s been said runs counter to conventional wisdom, which says that governments run deficits because spending well exceeds government revenue. Such a view implies ferocious market stupidity whereby just any government can borrow.
To see the fatuity of such a belief, stop and imagine if instead of California’s governor, Gavin Newsom were governor of West Virginia. Would the Mountain State have debt equal in dollar to California’s? Hopefully the question answers itself. Lacking the billionaires that are increasingly common in California, West Virginia lacks sufficient tax revenues now and in the future that would enable such substantial borrowing.
It’s common to say that California’s best days are behind it, but the state’s soaring debt indicates the exact opposite. And that’s not because government spending is stimulative. By its very description, government spending is the opposite of stimulative as is always the case when politicians substitute themselves for the marketplace in the allocation of precious resources.
Still, the situation in California will hopefully bring about a more reasoned discussion of government deficits and debt. Both are an effect of excessive taxation, of too much tax revenue now and the expectation of much more in the future, not too little. All of which runs counter to the popular view that says the only fix for all the debt is more tax revenue, reduced government spending, or both.
California reminds us that the accepted solutions for government debt on the local, state and national level will never succeed precisely because they gloss over why governments run up debt to begin with. California has a growing roster of billionaires, and its soaring debt is the symptom. Governments have debt because they take in too much tax revenue, not too little.
