Great Moments in Federalism and Fiscal Responsibility


How would you finish this sentence?

While the draconian [budget] changes under consideration in many states are a sad legacy of the economic downturn, their sheer magnitude represents a failure of…

"State governance"? "Fiscal stewardship"? "Basic competence of our bipartisan governing class"? Nope! Here's how The New Republic's Alexander C. Hart finishes the sentence:

…the federal government: From Hill Republicans to President Obama, officials in Washington are proposing new budgets that wouldn't do nearly enough to assist the states.

We told you in April 2009, and we'll keep telling you until it trickles down to the thick skulls of policy journalists and pols alike: States jacked up spending by 81 percent (adjusted for inflation) between just 2002 and 2007, when the economy was going just fine. In order to make the case for poverty (let alone the case that it's the federal government's responsibility to bail out the bad decisions by state governments), you have to ignore that pre-recession spending binge. Sure enough:

States are facing these gaps largely because tax revenues are well below historical norms—Texas, for example, is projected to collect $72 billion in fiscal 2012 and 2013, down from $87 billion in the two years that preceded it—and the bad economy requires governments to support more people with unemployment and Medicaid benefits.

That's one way of looking at it. Here's another

In 2002 states collected $535 billion in taxes; by 2007 that had grown to $749 billion, an increase of 40 percent, or more than twice the rate of inflation and population growth.

The robust growth in state tax revenue during this five-year period is only part of the story. The pace of this growth is notable: rising slowly out of the recession, increasing rapidly, and then beginning to taper off in advance of the general economic slowdown. In 2002–03, the rate was 2.4 percent. By 2004–05, it had leaped to 10 percent. In 2006–07 it was down to 5.4 percent—a more moderate level, but still far ahead of inflation.

The decline in the rate of tax revenue growth ought to have sent a signal to state budget drafters. Instead, they seem to have looked beyond the data and assumed continuing strong revenue growth. State budgets for fiscal year 2008, which were drafted toward the end of the period analyzed here, called for more than an 8 percent annual spending increase on average. Small wonder states had to make mid-year adjustments to their budgets in the middle of 2008 as the economy began to cool.

Instead of socking away money during the good times, state governments ladled out the windfall to public employees, and made pension promises no honest bureaucracy could keep. President Obama and the Democratic Congress bailed them out twice with buckets of cash, but the new House Republican leadership doesn't seem so keen.

And for good reason. There are too many people in or near power who honestly believe stuff like this:

These cuts not only impose a human cost; they also threaten to undermine our fragile economic recovery. While it's tempting to cheer government belt-tightening—if families have to make sacrifices, why shouldn't state governments?—they're ultimately harmful in the same way as private-sector reductions. Unemployed government employees, just like unemployed factory workers and CEOs, will spend less money in malls, on groceries, and at the movies.

Not to belabor what should be the obvious, but there is a key difference between a laid-off machinist and a laid-off bureaucrat, and it's not just the lavish pensions of the latter. Public employees are compensated (and handsomely) with our money, factory workers (well, most of them) are not. If you reduced the amount of tax money dedicated to compensating public employees, especially those whose work is not adding to the general welfare, you could theoretically increase the amount of their own money individuals were allowed to keep, which would have a stimulating effect on the economy. Government spending was sharply reduced in the United States after World War II, in New Zealand in the 1980s, and in Canada during the '90s, and in each case the result was not economic armageddon, but strong economic growth.

Using government as a means to prop up employment is an experiment whose failure is not obscure. And using still more tax money to bail out the reckless waste of other tax dollars is a recipe not for growth, nor fiscal responsibility, but eventual collapse.

I wrote about the state bankruptcy idea last month.