Why doesn’t West Virginia have more debt? The question rates asking in response to a Wall Street Journal editorial which observes that California “is facing huge budget deficits despite an ebullient stock market and capital-gains rush.” The answer to the West Virginia question can be found in the Journal editorial’s observation.
Explaining the California deficit and debt situation, the Journal editorial cites analysis from the state’s non-partisan Legislative Analyst’s Office (LAO) that suggests it’s an effect of “spending growth continuing to outstrip revenue growth.” The LAO implies that markets are rather stupid.
That’s because money is ruthless. See California. Debt for Silicon Valley startups is a non-starter given the 90 percent+ failure rate among those startups. Since most die, and die very quickly, there’s no interest rate high enough to reward startup loans. Which means it’s equity finance all the time.
Why the digression? It’s useful as a way of explaining the problem with the LAO’s explanation for California’s debt. It’s not just disdainful of markets, it’s incorrect. It implies an easy money spigot for individuals, businesses, states, and nations that doesn’t exist. Translated, California won’t be able to run an $18 billion deficit for 2025 simply due to “spending growth continuing to outstrip revenue growth.”
In truth, the deficits and debt are explained by the Journal editorial’s observation of “an ebullient stock market and capital-gains rush,” the former largely an effect of California-based companies (public and private) like Apple, Nvidia, Google, Meta, OpenAI, Databricks, Anthropic, and so many more, and the latter driven largely by California technologists realizing gains on their innovations. A government with taxable access to all that wealth creation can easily borrow, and borrow in size amounts.
Which explains West Virginia. Why is projected debt for the Mountain State in 2025 a mere $400 million when California allegedly faces “an $18 billion budget gap”? Parroting baseball great Bryce Harper (as is done throughout The Deficit Delusion), “clown question.” But if more clarity is required to figure out the wide debt gap between West Virginia and the Golden State, return yet again to the Journal’s observation that California “is facing huge budget deficits despite an ebullient stock market and capital-gains rush.” Get it?
While California-based companies largely drive the stock-market rally of the moment, and realistically every single equity market rally of substance over the last 45 years, West Virginia can’t make a similar claim. Since it cannot, there’s very little lender appetite for its debt, while there’s enormous appetite for California debt.
Which raises a question about the incredulity found within the Journal editorial about California’s debt situation. Without defending the state’s budget deficits or debt for even a second, politicians exist to spend. For California politicians, they not only frequently enjoy soaring tax revenues to dole out, but those same soaring tax revenues also make borrowing to fund even more spending a snap.
Back to the LAO, for it to tie California’s deficit and debt problem to “spending growth continuing to outstrip revenue growth” is to miss the point almost entirely. California’s spending that continues to exceed revenue growth is an effect of too much revenue now, and of much greater importance, a market expectation of much more tax revenue in the future.
Which, when you think about it, explains enormous federal debt too. Take California taxpayers out of the federal tax equation, and there’s much less federal tax revenue and much less federal debt.
Come to think of it, some made exactly the above point during debates about SALT deductions. They were ridiculed.
Originally posted to Real Clear Markets.
