Economics

A Feeling of Total Un-Reality Pervades So Much Discussion About Government Spending and Deficits, Especially at The State Level (Take Michigan, For Example), I Just Don't Get It Anymore, But I Do Get Angry…

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Sorry for the prose-poem headline to this post, but if you need to understand at least part of why virtually every local, state, and federal government in these United States is flat-out bankrupt, consider the apparent defiance of basic reality that pervades the debate like termites on a rotten log.

Here's the opening to a New York Times story about the sad state of Michigan:

LANSING, Mich.—Long before California resorted to i.o.u.'s to pay state bills, and before New York's political insurrection made a mess of this year's budget planning, and even before the recession pushed dozens of other states into their worst fiscal distress in decades, lawmakers here were cutting.

The Wolverine State has long had a sub-par economy, with high unemployment and job loss. So you figure that when the reporter says "lawmakers here were cutting" "long before" other states started slashing their budgets that she would mean, well, that Michigan's state budget would be, you know, smaller one year than in the year before. That is the plain-language meaning, right?

Here's data on Michigan's total outlays. In 2000, with a population of 9.9 million, Michigan spent a total of $25.5 billion, with local spending adding $35.9 billion. In 2009, with an estimated population of 10.4 million, Michigan is expected to spend $38.8 billion, with local spending coming in at $43.3 billion.

The source of those numbers is this website that tracks all sorts of government spending for all the states and which uses publicly available (that is, not secret) data. It is not immediately clear to me that the year-to-year figures are adjusted for inflation. So let's assume that they are nominal dollars. There is simply no way, in any reality worthy of the name, that an increase of $13.3 billion over nine years can or should ever be described as a trend in "cutting." Indeed, if you adjust for inflation (using this calculator), $25.5 billion would have been $31.58 billion in 2008.

Here is how the Times reporter characterizes the sustained increase in spending:

On paper, the state's overall spending has remained fairly steady and even increased at times this decade, but budget officials say those figures reflect necessary spending increases for Medicaid and corrections.

Think about that for a second: Spending has remained flat. Except when it's increased. And when it did increase, it was only because we really had to spend the money. I've had friends who were junkies who were better bullshitters than the sources behind that characterization.

Scroll through the breakdown of Michigan's spending categories and the one thing you don't see is flat spending on anything. It all goes up, which incidentally helps explain why the state's spending is well, significantly higher than it was less than a decade ago.

The Times article does include a chart on general revenue, adjusted for inflation, for Michigan (why do reporters always report revenue, especially when it makes a pol's pockets-out case?). What it shows is a dispiriting situation to be sure, and one that has been fully evident for 30 years before totally crapping out in the '00s:

Which is to say, Michigan lawmakers should have seen all of this coming, at the very least. Yet, as one pol tells the Times, "Our rainy-day fund? There's $2 million in there. That won't last you 30 seconds." And note that the general fund is not the only money-maker for Michigan; the expected deficit for this year is $2 billion, so the state is actually still raking in beacoup bucks.

Until legislators and their enablers in the press (and citizens, too!) start grokking the full picture of revenue and outlays, don't expect any sort of public-sector epiphany that leads to anything like well-run state governments. The simple fact is that governments are generally in trouble because they are spending well beyond their means and not because they don't have any means.

For more on this, read the May 2009 Reason cover story, "Failed States: After a long spending binge, governors go begging for a handout. It won't be their last":

Consider the boom cycle preceding this latest recession. In the five years between 2002 and 2007, combined state general-fund revenue increased twice as fast as the rate of inflation, producing an excess $600 billion. If legislatures had chosen to be responsible, they could have maintained all current state services, increased spending to compensate for inflation and population growth, and still enacted a $500 billion tax cut.

Instead, lawmakers spent the windfall. From 2002 to 2007, overall spending rose 50 percent faster than inflation. Education spending increased almost 70 percent faster than inflation, even though the relative school-age population was falling. Medicaid and salaries for state workers rose almost twice as fast as inflation.

More here.

Bonus info: Jack McHugh of the free-market Mackinac Center explains how Michigan found itself in its pickle and suggests how to save $2.2 billion right here, right now.

NEXT: Reason Morning Links: Day Two of Sotomayor Hearings, Dems Lay Out Tax Plan To Fund Obamacare; Chicken Fights in the Cities

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  1. People don’t go into politics because they have any fiscal sense, Nick. Knowing what money is is for the little people!

  2. What somewhat surprises me is how pervasive the bullshit is from all of these poor governments. They all have to know that if they were to roll back spending a few years, this “crisis” would be totally averted. We had schools, prisons, roads, etc. a few years ago, so obviously the spendathon they enjoyed during the revenue boom didn’t include dime one of anything critical.

  3. Nice post. A big pile of shit is flying towards the fan.

  4. In Virginia, one of the solutions to the budget woes is to cut as visible a service as they can. So they are shutting down the interstate rest stops during peak summer beach season. Just like when school boards cancel high school football whenever their budgets are threatened.

    Obviously the rest areas should be privatized, but that is another story.

  5. Does your mother know you have junkie friends, Nick?

  6. It’s all John Engler’s* fault.
    [/Dem party line]

    * Jenny’s been governor since Jan 1, 2003.

  7. In Virginia, one of the solutions to the budget woes is to cut as visible a service as they can.

    I think every government and agency plays that game. Here in NYC, the subway is billions of dollars in debt and the first cuts they threaten are customer service and cleaning crews. And none of these threats ever stand a chance of leading to a balanced budget, either.

  8. General Fund is meaningless. Most states took all their lottery funds out of the general funds and into specific funds. Same with most sin tax increases.

  9. ummm — the population increased by 500k between 2000 and 2009? I can’t understand why people stay (including my brother, who can’t find steady employment), let alone why another half a million people would actually move there.

    Oh, wait – did you say welfare and Medicaid payments are up? (dawn breaks over Marblehead)

    WFIW – I left Michigan for college in 1975 and never looked back. Nice place for outdoorsy vacations, tho…….

  10. correction “FWIW”

  11. Government is dumb.

  12. Nick, Nick, Nick……silly you for expecting lawyers (the vast majority of politicians are lawyers) to understand something so simple as basic math. Now, on the other hand, what lawyers ARE good at is bullshitting.

    Sadly, the personality type that self selects into, uhhhh, physical reality based career fields shall we call it, such as engineering & medicine to name a couple, tends not to be the personality type that would want to run for political office.

    The personalty type that self selects into the bullshit artist fields (too many lawyers and B-school types) tends to be the same personality type that enjoys the power that goes with elected office.

    So, what we get is a bunch of bullshit artists saying that spending 20 billion this year is a “Cut” when they spent 18 billion last year.

  13. In McHugh’s list of suggestions for saving money, I was tickled to see his suggestion for prison reform: create a “private option” that would function as a competitive stick to force the public-run prisons to “sharpen their pencils.” Not to put too fine a point on it, but this stands in sharp contrast to the very popular proposal to create a “public option” in health care, which would put the fear of competition into those nasty, private-sector providers. I have a hunch (and I clearly admit that it is just a hunch — a well-reasoned argument could talk me out of it) that both things can’t be effective.

    Also, note that the largest portion of McHugh’s savings — 30% — comes from forcing state employees to pay 25% of their health care package costs. This seems to be as good as declaring that the skyrocketing cost of health benefits for state employees is the tail wagging the fiscal-crisis dog. Isn’t a pension crisis also lurking right around the corner?

    Finally, McHugh compares state employee “wages and benefit” packages to those in the public sector, and notes around $20K in discrepancies favoring the average government worker. Is this over and above the money spent on health care benefits, the State’s share of which McHugh wants to cut by 25%? Said another way, if Michigan forces its employees to pay 25% of their own health benefits premiums, wouldn’t the value of the “wage and benefits” package for the average employee go down, eliminating most of the discrepancy between government and private-sector average compensation? If so, wouldn’t McHugh’s proposed savings in this area also melt away? Is McHugh counting benefits packages twice?

  14. A slight correction that actually makes the spending growth look even worse. If Michigan’s population had grown from 9.9m to 10.4m in the last nine years, then all other things being equal we’d be looking at 25% unemployment rather than 15%.

    The 2000 number is accurate… but we’re barely over 10m right now.

    See here…

    http://www.senate.michigan.gov/sfa/Economics/Michigan&USPopulation.PDF

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