Government is the largest employer and spender in the world. Let’s say that all local and state governments had to reduce spending by 2-3% per year for the next 5 years. That would have a serious impacton all individuals and businesses. Human resources or projects are the only mechanisms for government to reduce costs. So you lay off a bunch of employees and add them to the unemployment benefits line, or figure out a way to lower their salaries and benefits. Next step is to get the general contractors to do the same or more with less money. Hence, businesses are now under pressure to reduce costs via employment or salary reductions, or reduce their purchasing costs.

So now we have housing price deflation, employee salary deflation, and business deflation all working in a vicious circle.

So why does California matter? The State of California is the 6 largest economy in the world. The decisions made in California effect every living person in the world today. If California slows spending the rest of the world will feel it. This will be especially true if California has to slow spending to the tune of 2-3% per year for the next 5 years. Everyone who does business here will have to figure out a way to reduce costs and in turn potentially create more deflationary pressure.

If you think the federal government can save the day you are gravely mistaken.