May 25, 2001
The California Economy is Too Big to Ignore
We've all had our fun with the news from California lately. When it comes to growth and prosperity, those same states that have been left in the dust by the Golden State over the last few decades are feeling pretty smug now that the West Coast's electric grid has deteriorated to the status of a lesser-developed country. And if that wasn't enough comeuppance for the left coast, its high flying technology economy, and many of its youthful instant millionaires, have taken it on the chin as well.
But as we wax righteously about the folly of California's energy policy, its political leadership, or even its laid-back style of business, we may want to temper our words. Its problems may be of its own making, but they may soon become our problems as well.
States in the west are already keenly aware of this. With energy-starved power companies hunting down every electron on the western grid that is available for sale, the wholesale prices faced by many states, not just California, have soared. How high? Amazingly, we cannot say. The state has not divulged the terms of recent electricity purchases, for fear of compromising its bargaining position in the negotiations over the crucial high-demand months of the summer.
But prices are said to have risen at times beyond $1,500 per megawatt-hour, or nearly five times as high as what the state can reasonably sustain without a financial emergency.
Throw into the mix a deteriorating revenue forecast brought about by the technology slump and the makings of a budget implosion are staring political leaders in the face.
If the bad news were limited to state government finance, the rest of the nation might be forgiven for turning a blind eye. But the energy woes are both causing, and coinciding with, a malaise that has taken the steam out of the state economy's sails. Even if rolling blackouts were not disrupting production, driving up costs and killing planned job expansions, the bloom would still be coming off the Golden State's economic rose. But a bungled attempt at electricity deregulation, coupled with low rainfall and sky-high prices of natural gas have helped transform what could have been a brief, painful contraction in the technology sector into a broader economic downturn of more serious consequence.
When a 13 percent piece of the national economy goes from boom to bust in the short space of six months, its effect cannot but be noticed. When defense cuts, coupled with a cratering of real estate values, plagued the California economy in the first half of the 1990's, its drag on the national economy was palpable. Much of the billions generated in the heady days of the pre-2001 new economy found its way into the coffers of businesses across the country, including Indiana, and is sorely missed today.
That's why the federal government should take a more active role in helping to ease California's short-term energy crunch. As distasteful as it must seem for market-oriented policy-makers in Washington to bail out a state policy predicated on not letting markets operate, that's a tiny discomfort when measured against the damage in confidence and in growth that could occur if the most populous state's infrastructure is allowed to wither in the summer heat.
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