As everyone knows, California’s state budget is in dire straits. Unlike the federal government, US state governments really do finance their spending through a combination of tax revenues and borrowing. They are users of the nation’s currency (the dollar), not issuers. The current recession (or depression) has caused their tax revenues to collapse. Their projected budget deficits cause ratings agencies to downgrade their debt—making it too expensive to borrow as this sets off a vicious cycle of further downgrades and ever rising interest rates.
That could be a step in the right direction, but it is still borrowing. Here is a suggested improvement. The state should announce a new currency, the California Dollar. Henceforth, the California Dollar will be accepted in all payments made to the Great State of California (fees, fines, and taxes, including payments made by students to the state’s public universities). The state, in turn, will begin to make a portion of its payments in the form of California Dollars. Of course, no one can actually make payments in the form of California Dollars until the state has actually spent some into existence. State payments using California Dollars will be made, as described above, to “vendors and local agencies”. Over time the state can negotiate with others, including employees, to pay out California Dollars. Note that the state will run deficits in California Dollars only to the extent that the population wants to accumulate those Dollars (in excess of the fees, fines, and taxes paid).
Some readers might worry about anti-counterfeiting laws. So far as I understand it, the California Dollar would be treated like the “local currency” systems already in operation around the nation. In the beginning, California will probably value the California Dollar at par against the US dollar. However, it should not promise to convert the California Dollar on demand since that could lead to insolvency (after all, California’s current problem is that it cannot get enough US dollars to cover its spending). The California Dollar would be freely convertible in private exchanges, however—at a floating rate. Exchange rates are very complexly determined and I would not want to predict how the California Dollar will do over the next few years. However, since this proposal would allow California to halt the “Little Hoover” downward spiral occurring in states all across the country, I expect its new Dollar would do pretty well.
Who knows, maybe Arnold—not Obama–is the next FDR?