California Scrip?

The California budget impasse continues. Yesterday Governor Schwarzenegger vetoed tax measures passed by the Democrats in the California state legislature. The state is forecast to run out of cash soon, and there is even talk about it issuing IOUs ("registered warrants") for tax refunds. It is unclear whether banks will accept this scrip or whether a market will develop for them.

If this happens and the scrip is outstanding for a while, it could be similar to California issuing its own money (even if not very good money), though I am sure the state's lawyers will have prepared arguments about why the warrants are not money.

In 1992, the last time California issued scrip, it was used to pay California state employees. Using it for tax refunds raises the profile of this maneuver to a new level. Maybe this will force the needed two-thirds of the state legislature and the governor to come to a compromise on the budget. (For the type of comment about this that would become more general if the warrants are issued on a large scale, click on this link.)

California's financial situation also highlights the general problem that, as the federal government plans a stimulus package, this will be offset to some extent by state governments being forced to cut spending, raise taxes, or some combination of both. Paul Krugman recently had a column about this problem ("Fifty Herbert Hoovers").