The State Budget Crisis Peaks Tonight

Today, June 30, 2009… another financial reckoning day.

Midnight tonight marks the end of fiscal 2009 for 46 states in the US, and various state constitutions require 45 of ’em to have a final budget by tomorrow morning.

Thus, 10 states are facing a true blue crisis — California, Connecticut, Pennsylvania, North Carolina, Delaware, Illinois, Ohio, Indiana, Mississippi and Arizona do not have budgets in hand on the eve of the new fiscal year.

Of those 10, California and Arizona are looking particularly dire. Arizona faces a $3 billion budget shortfall, or around 30% of its annual budget. California needs to fill a whopping $24 billion gap, roughly 26% of its annual tab. Gov. Schwarzenegger says without a budget, he’ll be forced to start writing IOUs tomorrow to the state’s creditors… scary stuff. Once one of the richest states, California now has the worst credit rating of them all.

“Whenever I talk about the Great Depression and compare it with what is going on today,” says Chris Mayer, “I get a lot of skepticism. I hear a lot of people say, definitively, ‘This isn’t as bad as the Great Depression.’

“What you have to remember, though, is the Great Depression unfolded like a train wreck in slow motion. It took awhile before it became the Great Depression. It wasn’t like someone flipped a switch and poof! — bread lines, Hoovervilles and hobos.

“Another point to remember is that the Great Depression was a global economic event. It wasn’t just confined to the U.S. You have a take a wide-angle view of the global economy to get a better sense of the breadth of the slump. And so it is today.

“Take a look at this chart, from economists Barry Eichengreen and Kevin O’Rourke. In terms of industrial output, we’re tracking the Great Depression’s path pretty closely.