Governor Schwarzenegger has gone public with the unsurprising news that the California state deficit is ballooning. New York state ditto. We have built up an overload of grossly overpaid bureaucrats. Instead of cutting services, eliminating jobs and raising taxes, as the Governator suggests, how about all state employees take a 10% pay cut? That would more than fix the problem and still leave them way overpaid by private sector standards (excepting banking  executives, of course, but that’s another rant).

On the city front, bankrupt Vallejo is having its $316,000 city manager take a 10% cut (oh the pain) and all employees except firefighters and police will take two unpaid days of vacation. Of course, considering that the police and firefighters are 80% of the budget, that’ll have a big effect, right. Clearly these drastic measures will put the sinking ship back on an even keel right away. Not. At some point, the ridiculous over-compensation of firefighters and, to a lesser extent, other city employees will have to be addressed.

Of course, the elephant in the room is the federal government. The dollar is tanking now that the carry trade panic seems to be over as people worry about the enormous federal deficit (7% of GDP according to The Economist newspaper)

This all threatens to add up to a deficit of at least $1 trillion, or nearly 7% of GDP, this fiscal year, a figure that is likely to force the next president to postpone some of his more ambitious proposals.

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The next president will no doubt find deficits at 7% or more of GDP sobering enough. Without a plan for cutting that high figure back once the financial crisis and the recession pass—and with the inexorable climb in Medicare and Social Security costs as the baby-boomers retire now under way—investors may need to be compensated much more than they are now to keep on buying America’s debt.