Economics

Here's an Idea for Fixing State Budgets! Give Them Free Money!

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We'll be responsible during the good times! We promise!

Speaking of nationally impacting fiscal irresponsibility at the state and local level, UC Berkeley Law School Dean Christopher Edley Jr, takes to The New York Times today to explain why the 50 states should be allowed to borrow money directly from the U.S. Treasury. After all, "We did this for Wall Street and Detroit, fending off disaster. It's even more important for states." Excerpt:

Congress should pass legislation that would allow a state to simply get an "advance" on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount over, say, five years. Of course, when Treasury eventually collected what it was owed, the state would have to cut spending or find new revenue sources. But that would happen after the recession, when both tasks would likely prove easier economically and politically.

What would this cost the federal government? Nothing. There would be zero risk of default, and a guarantee of full repayment plus interest equal to what Treasury pays in the bond markets to borrow. Congress would need only to appropriate the administrative costs of this program, which would be minimal.

Cuz everybody knows that the good times is passed out cold

I'm totally convinced. Excerpt for the part about how after the last recession, states did not find it politically easier to "cut spending"–they boosted spending twice as much as the rate of inflation. A refresher course from our May 2009 "Failed States" cover story, with its prescient subhed "After a long spending binge, governors go begging for a handout. It won't be their last":

In 2002 the National Governors Association issued a press release saying the "states face the most dire fiscal situation since World War II." In 1990 The New York Times reported that states and cities faced a "fiscal calamity." Fire up Google, pick almost any year, and you'll find plenty of stories about a "fiscal crisis" around the nation.

For decades statehouses have followed a predictable schedule. In good economic times, they collect a lot more tax revenue than they really need. But instead of giving the money back to taxpayers or putting it in a rainy day fund, they pretend the good times will never end. When the good times do inevitably come to a close, governors plead poverty and either ask the federal government for help or raise taxes on their beleaguered citizens. Eventually, the economy rebounds and the vicious cycle starts again. […]

That's one for you 19 for me

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.

Hey, let's give this gang the same money-printing license as the feds! What could possibly go wrong!

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  1. Need I even point out that Mr. Edley used to be a Harvard Law prof?

    1. Nyet.

    2. Nyet.

      1. That’s Russian for ‘no’…Twice!

        1. It would make a good name for an NBA player. N’Yet James.

  2. The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount over, say, five years.

    I shouldn’t laugh that loud at the desk.

  3. Nice alt-text, Mr. Kline has a lot to learn. I guess that is what an internship is for.

  4. Congress should pass legislation that would allow a state to simply get an “advance” on these future federal dollars expected from entitlement programs.

    I can foresee no possible future negative results from this action.

    Excerpt for the part about how after the *last* recession, states did *not* find it politically easier to “cut spending”–they boosted spending twice as much as the rate of inflation.

    It will so totally be different this time. States will have learned their lesson by having almost been forced to cut spending (increases).

    1. I am Christopher Edley, law school dean and distinguished chair of Zimbabwean economics at UC Berkeley, and I approve this message.

  5. Maybe I’m kind of an old fuddy-duddy, but aren’t we in this mess because of lending money to people WHO HAVE NO REALISTIC MEANS OF REPAYING IT?

    1. No, we’re in it because we STOPPED lending money to people who can’t pay it back.
      The only problem with the plan is all the intermediaries – they should just give millions to Fresno Dan directly. A boom in booze production! A boom in stripper employment!

  6. We are all retards now.

  7. goddamn it, at this point why don’t we just do this:

    1) issue every american $30,000.
    2) issue every state enough to cover all of its debts.
    3) repeal the clause in the 14th amendment prohibiting questioning the validity of the public debt and issue a prohibition against public debt except for wartime spending.
    4) default on our debt.

    The inflation from #1 and 2 should be balanced by the deflation in #3.

    1. #4 is also good because NO ONE WILL EVER LEND TO US AGAIN.

    2. you could give the solvent states (what all one of them?) 5x their current budget to reward them for their austerity.

    3. Pay off my mortgage and car, too, and I’m so in!

  8. Money, it’s a crime.
    Share it fairly, but don’t take a slice of my pie.

  9. So, at a first glance, I’m in favor of saying “no deficit spending.” We shouldn’t be spending money that we don’t have.

    But I seem to remember someone making an argument that deficit spending could have it’s uses from an economic stand point, but I can’t remember what it entailed.

    Can you guys think of an example where deficit spending would be beneficial?

    1. great for banks and sovereign debt holders.

    2. Also, if your country is being invaded.

    3. But I seem to remember someone making an argument that deficit spending could have it’s uses from an economic stand point,/blockquote>

      John Maynard Keynes and the rest of the Neomercantilist economists. Richard Nixon also liked the idea.

      but I can’t remember what it entailed.

      Ultimately: stagnation, inflation, shortages, price controls, waiting lines, and recession.

  10. The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount

    Top men.

    *weeps, bangs head on desk*

  11. What would this cost the federal government? Nothing.

    Wheeee!

    What

    are

    we

    waiting

    for?

    1. Those evil Republicans to stop filibustering needed, popular, and deficit neutral legislation.

  12. UC Berkeley Law School Dean Christopher Edley Jr has never worked a single fucking day in the private sector. Here’s his pathetic bio.

    1. Wow, that is some political resume.

      1. lemme clean that up for ya…

        Matt Welch|7.8.10 @ 11:56AM|#
        Wow, that is some politicalparasitic resume.

        1. Wow, that is some politicalparasitic resume.

          Isn’t that redundant?

      2. Hire him.

    2. Defense Department procurement law

      wtf?

  13. Yeah buddy. Gotta love that free money!

    Lou
    http://www.web-anonymity.au.tc

    1. Obama money! From his stash!

  14. Oh! You sexy, filthy little bitch!

  15. The very worst aspect of this argument is its blatant dishonesty.

    This douchebag actually expects us to believe that, as soon as the advances are extended to the states, he and those of his political bent won’t immediately start lobbying for the repayment scheme to be “extended” due to “unforeseen circumstances” or “continuing uncertainty” or what have you.

    Just like assholes like him can dutifully parrot the line that Obamacare doesn’t add to the deficit, and then the very next day agitate for the “Medicare Doc Fix”.

    I am rapidly coming to the conclusion that the first problem, the fundamental problem, in American governance isn’t even the statism any more. It’s the epic dishonesty. It’s the dishonesty that is so expected that no one even comments on it, and it’s considered bad form to comment on it.

    1. “I am rapidly coming to the conclusion that the first problem, the fundamental problem, in American governance isn’t even the statism any more. It’s the epic dishonesty.”

      It’s the horrific level of education and intelligence of the average American.

      Politicians are going to do whatever they can get away with doing, and the American people let them get away with it.

    2. This douchebag actually expects us to believe that, as soon as the advances are extended to the states, he and those of his political bent won’t immediately start lobbying for the repayment scheme to be “extended” due to “unforeseen circumstances” or “continuing uncertainty” or what have you.

      We merely deal with political realities.

  16. There is one very simple solution to the problems that states and municipalities continually face: end public sector unions and employment contracts, and allow states and municipalities to hire and fire at will, and to adjust pay and benefits with the same freedom that private sector employers with non-union workforces have.

    The public sector unions (especially teachers’ unions) are the single largest cause of the fiscal insanity.

    If the government is really about being a “necessary evil” and provides things that the private sector just can’t provide, there is no excuse for government employees being unionized: you serve at the pleasure of the taxpayer, at the rates the taxpayer may deem appropriate, and the taxpayer can hire you or fire you at will.

    That’s a national platform I could get behind. How about you?

  17. 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.

    Which would have stimulated their economies far more than borrowed money from the feds. Which would have brought them increased revenues from that economic activity increase. Allowing them to avoid the current situation we’re in now.

    1. But does it help get politicians elected?

      1. We don’t get elected… we’re appointed by the president.

  18. You would get the same result as you see on an individual scale. The financially responsible states would end up bailing out the financially irresponsible states.

  19. This is what you get when a Law School Dean starts babbling about economics – something he obviouly knows nothing about.

  20. Sounds good to me!

  21. 1) Let Treasury Rescue the States

    2) Let the States Rescue Treasury

    3) Loop Infinitely

    As an added free benefit, the power generated from this scheme will make us independent of foreign oil!

  22. No such thing as free money. Nothing is free ever. Someone paid a price or will pay a price for everything. Always have always will!

  23. In 2002 the National Governors Association issued a press release saying the “states face the most dire fiscal situation since World War II.” In 1990 The New York Times reported that states and cities faced a “fiscal calamity.” Fire up Google, pick almost any year, and you’ll find plenty of stories about a “fiscal crisis” around the nation.

    We find Google is the problem.

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