Why California is Not too Big to Fail

California is big, very big. If it were a separate country, it would be one of the largest economies in the world: somewhere between the 8th and 10th largest, depending on the year and source you look at. In 2007, California’s gross state product was $1.812 trillion, number one in the country. In terms of population, California is the largest state in the U.S. with about 38 million people, or about one-eighth of total U.S. population. California is also a pretty large employer: in 2009, the state had, on its direct payroll, 244,061 active employees. By these measures, California is certainly “bigger” than, say, AIG, which has received something like $173 billion in US taxpayer money. Hundreds of other banks, insurers and even a few manufacturers (all much smaller than California) have received bailout funds as well, ranging from a few million dollars to tens of billions of dollars. Despite California’s immense size, however, there is almost no prospect that it will receive federal “bailout” funds to help it out of its current budget mess—a deficit that exceeds $26 billion (really, pocket change in light of the amount of money AIG has received).

All of this raises the obvious question, “Is California too big to fail?” This is a question many pundits have also asked and answered: most answer that California, in fact, is not too big to fail. I think they are right, but they are asking the wrong question. The right question should focus more on the “power” of California as a state. And, as an economic and political actor, California has precious little power. It is important at this point, however, to take a small step back. When I speak of “power” I do not mean the power that comes from just being big. Indeed, that’s a small aspect of power, especially from the standpoint of political economy. Instead, when I speak of power, I’m borrowing from the ideas of Susan Strange, who talked about structural power and, more specifically, four dimensions of structural power: security, production, finance, and knowledge. I don’t have time to discuss all these dimensions here (to learn more, take my POLS/ECON 426 course), so let me just say that in terms of structural power, California is quite small.

As an economic and political actor, for example, California doesn’t have much productive power in its own right: “California” doesn’t produce things in the way that Chrysler or GM do (two economic actors that received bailouts); rather, it’s the companies that are based in California that produce things. Similarly, while banks and large financial institutions have power because they control “credit” (the lifeblood of an economy), California’s financial power is very limited. The state does provide security, which is why police, prison system, and the courts are much more protected than other players in the state, but this isn’t enough to protect the budget as a whole. Finally, the state does have a university system, which produces “knowledge,” and this is not unimportant: but “knowledge” comes from a wide variety of sources, both inside and outside of California, so even here the state is a relatively small player.

Without structural power, the state is basically at the mercy of larger forces. This is why California is not too big to fail.