I keep hearing those two (seemingly opposite) statements in the news and don’t know what to make of it. Help me!
In: Economics
Because doing financially great and being in debt is two differents things. Even if the state is doing well, it they have a lot of governemental services and don’t raise enough taxes to pay for them all, they need to go in debt.
Now you need to understand that debt for governement have different implication. Debt for someone is an investment for someone else, the person that ask for interest. The riskier the investment (debt) the higher the interest rate and vice versa. You can’t really get less risky than a stable goverenement and so their interest are really low. At the same time, their economy usually grow at a decent rate, often higher than their interest rate. This mean that over time the debt become less and less important as the economy growth and the debt became a smaller percentage of the overall economy.
Being into debt is a smart thing to do for a country, but also for people in general. Most people are in debt for their car and their house, but that doesn’t mean that they are financially in trouble. Of course if you are too much in debt it can be a problem, debt is a tool that can help or hurt you depending on how you use it. But for goverenment it’s essentially free money. They don’t have to pay the debt off, just pay the interest. The governement had some money to pay their services without raising taxes (which is unpopular) and the holder of that debt get some low risk/low interest investment. If the holder don’t want it anymore, he can sell it to someone else and the country don’t need to pay it off. There is always some people that want to buy that debt, because such a low risk invetsment is rare. Remember, you can’t really get less riskier than a stable governement.
Now, governement are huge, everything about their finance are with big numbers and so when you look at their debt, someone that doesn’t really understand all of that might thing that they are drowing in debt, even if they are not.
[https://www.usgovernmentspending.com/state_debt_rank](https://www.usgovernmentspending.com/state_debt_rank)
According to this the California debt to gdp ratio is actually really good. Usually, it said that you can be up to 75-80% and have no problem, after that it start to slow down you economy by a bit, but there is country that are over 100% and if their economy is solid enough it doesn’t really make too much trouble. Japan have a debt to gdp ratio of 223.8%, which is cause for concern, but the governement won’t explode soon and the country isn’t in an economic collapse. Now it’s a bit different for states, because there is some legal limitation on debt, but as you can see California isn’t really drowning in debt. 438.9 billions $ in debt seem like a huge problematic numbers, but California isn’t a family of 4, numbers have different meaning depending on the scale we are talking about.
Like most states, California is in pretty bad fiscal shape. Also like most states, this generally has two reasons:
* Pensions are expensive
* Medicaid is expensive
California is very middle of the road with respect to these problems compared to other states. The only reason why they appear out of the norm is when debts are listed in aggregate dollars compared to that of other states, effectively ignoring CA’s massive population and output relative to every other state.
California has been running a surplus for better part of a decade and only 14th in per capita debt. It makes it’s debt payments on time and still has money left over to save which puts it in a good spot financially. Someone probably has an agenda if they’re trying to tell you that California is drowning in debt.
Latest Answers