John C. Dvorak from Marketwatch has proposed a novel idea to help California out of the current economic disaster that they are currently in: Declare Bankruptcy. Dvorak makes the following point:

California cannot get out of debt without drastic cuts in spending, meaning layoffs and higher unemployment, meaning less cash flow back into businesses. The state cannot get out of debt without higher taxes, which means borderline businesses folding, creating more unemployment and depressing revenues . . . California already has issued IOUs to employees, which were eventually refused by the banks and ironically refused by the state itself.

So, basically he argues that California should just reset the entire system by filing for bankruptcy. He argues that during the proceedings Californians and Americans will then be exposed to the corruption, cronyism and abuse that public officials are involved in (e.g. firemen making from he $200,000 a year, friends hiring friends, etc.).

So, the question remains, is this a good idea? What happens when the country’s largest economy, indeed one of the biggest economy’s in the world, goes bankrupt? One consequence is that California could never run a deficit budget again because no one would ever give them any money. Perhaps this is a good thing though, California has shown through their actions that they are not worthy of being trusted to wisely spend money, balance budgets and generally not piss away tax payer funds.

It would also give them a chance to start over, but if they were to do so they would need to do so in a way that makes sense for California. As Dvorak also points out Washington state has no personal income tax, property tax is very low as is sales tax yet their government services are better, more efficient and the populace is generally more satisfied with their government. This is probably a good model for the state, but in any event they would have to cut services and pass tax regulations that actually work. In fact, for any of you doubting liberals out there, if you want to see liberal fiscal policy in action just take a look at California, that is what Obama wants to turn the federal government into. How’s that working out for ya?

Of course the negative consequences for California would probably also be severe, most importantly many retirement programs (especially SEIU and NEA retirements) are heavily invested in California bonds. What would happen to those portfolio’s if suddenly all of those “safe” bond investments suddenly were no more? It would cause serious economic havoc for a lot of folks, so there is no question there will be pain.

Generally bankruptcy is painful, but it is also a fresh chance for people, businesses, and yes, I suppose, even governments to get a fresh start and try things right. I don’t know if it would work or if the culture of California is permanently corrupted, but it is at least a thought. What do you guys think?