ECONOMY FEBRUARY 15, 2011
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State governments are facing catastrophic budget deficits for fiscal year2012, and they are suggesting drastic cuts to attempt to fill the gaps. But this proposed austerity may not be necessary, and, moreover, it is almost certainly unwise. While the draconian changes under consideration in many states are a sad legacy of the economic downturn, their sheer magnitude represents a failure of 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.
There is no denying that states’ budget problems are severe. Arizona is short about $1.2 billion, around 13 percent of its 2011 budget. Illinois faces a $15 billion gap, an astonishing 44.9 percent of its 2011 budget. Minnesota is forecasting a $6.2 billion hole, about a sixth of the state’s two-year budget. And California is grappling with the nation’s largest deficit—$25.4 billion, about 30 percent of what the state spent the year before. All in all, “44 states and the District of Columbia are projecting budget shortfalls totaling $125 billion for fiscal year 2012,” according to the Center on Budget and Policy Priorities. That’s only slightly less than the entire budget of New York.
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. What’s more, balanced-budget provisions—unlike the federal government, almost all states are forbidden from running deficits—also mean states can’t just borrow money while they wait for the economy to recover. So, as they have in recent years, states have proposed again slashing their spending, sharply raising tax rates, or a combination thereof.
The effects, unsurprisingly, could be devastating. In Arizona, if Governor Jan Brewer’s budget is enacted, 280,000 poor people will lose their Medicaid benefits. In Texas, one budget under discussion would lay off 9,600 state workers, eliminate financial aid for 60,000 college students, end vocational rehabilitation for about 7,000 disabled Texans, and slash already-skimpy Medicaid reimbursement rates by 10 percent. Illinois is filling part of its budget hole by raising its income-tax rates by about two-thirds, meaning that a family of four earning $60,000 would pay an extra $1,040 in state taxes.And the state also hiked its business-tax rate, meaning that Illinois’s total rate is now one of the highest in the country. But all the Illinois tax increases will fill less than half of the projected deficit, so steep spending cuts might still loom on the horizon.
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. When repeated across the country, budget cuts and higher taxes translate to fewer jobs, a higher unemployment rate, and a longer stay in the economic doldrums. Over the past few months, job losses in the public sector have been a drag on net job creation. Higher tax rates—like the ones enacted in Illinois—also slow economic growth by inhibiting entrepreneurial and consumer spending.
Even worse, some of this human and economic suffering is preventable. We have an institution that can borrow money to create stimulus and fill budget holes in times of crisis: the federal government. And, in 2009, when the stimulus act was passed, this was exactly the approach it took. Out of the stimulus bill’s $814 billion in tax cuts and spending, about $140 billion went to help states fund Medicaid and keep teachers working. Another $26 billion state aid package was passedin the summer of 2010. The money didn’t mean that states could wholly avert layoffs and spending cuts, but it did help ease the pain.
As states write their 2012 budgets, however, the money is almost all gone. And it is unlikely that getting more money for the states will be an easy, or even achievable task. Republican leadership has already positioned itself strongly against it. In late January, House Majority Leader Eric Cantor flatly announced, “There will be no bailout of the states,” a position that Senate Minority Leader Mitch McConnell quickly echoed.
But the GOP isn’t solely to blame. It is perhaps more dispiriting to see Democrats seemingly give up on the idea of state aid.In his State of the Union address, President Obama ignored the issue altogether. And the budget he released on Monday makes only small efforts at helping the states—a proposal that would allow states a two-year grace period to repay money they owe the federal government and some assorted long-term investment programs. All in all, Obama’s budget may actually make the situation in the states even worse because it would slash billions in funding for programs like Community Development Block Grants and the Low Income Home Energy Assistance Program.
The federal government cannot afford to provide state aid in perpetuity, nor should it. But, with unemployment still high and economic growth relatively slow, now is not the time to discontinue it. Some particularly dysfunctional states, such as California and Illinois, would be hurting even without the downturn sapping their revenues and forcing larger expenditures on social services. But, with more than 40 states suffering—red states, blue states, high-tax states, and low-tax states—it is difficult to argue that large budget deficits are a problem springing only from fiscal irresponsibility.
There are relatively low-cost options to deal with the problem, such as Christopher Edley’s proposal to let states take an advance on federal funds they’re due in future years. The federal government could even use some money for a Race to the Top-like program (recently used to spur education reform) to encourage states to make changes to ensure their long-run fiscal stability. No matter how it goes about it, Washington must continue giving aid to state governments. Put simply, the federal government should not ignore problems it could easily ameliorate.
Alexander C. Hart is a reporter-researcher at The New Republic.
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14 comments
Mr. Hart, when you are broke, you are broke. We are broke. Printing money to cover these short-falls honestly doesn't do anyone any favors. The solution, frankly, is living within our means. When times are good, you save, save, save. When times are bad, you draw down on what you saved. Instead, we tend to spend like a drunken sailor when times are good because, well, times are good. But then when times are bad, nobody is prepared to do without. Your argument is: "Well, it's actually not that much and besides, it's for a good cause" is how we got here in the first place.
- seattleeng
February 15, 2011 at 2:46am
Agree with Seattle except on his last point. The Republicans have made some serious mistakes when they were in control. Absent minded spending. Failed monitoring of the financial markets. Waging the Afghan war and not restoring security there before wandering off into Iraq and doing the same thing there, costing us trillions and making us unsafe. Reckless tax policies. Ignoring the bottom of the economy to maintain consumer demand while relying incorrectly on the top end to drive the economy (which clearly has not worked at all). A lowered dividend cap gain tax of 15%, diverting investment from small businesses to the stock market. Costly Republican mistakes got us here.
- Nusholtz
February 15, 2011 at 7:38am
We are in a financial straight-jacket, one that was fitted by the Republicans when they controlled Congress and the White House, and they continue to do everything they can to lay the blame on Obama and the Democrats, even creating and promoting an alternative reality. Obama's response has been to offer mea culpas (deficit commission dominated by conservatives, budget cuts, etc.) in the hope that shared blame would would move us on to solutions from finger-pointing. I am hopeful that, once the Republicans get beyond the current theatrics (at C-PAC, with the Tea Partiers, etc.) we can make progress with our financial house, including aid to the states. But the theatrics will drag on like a Eugene O'Neill play, so don't expect progress anytime soon.
- rayward
February 15, 2011 at 7:59am
rayward; sorry, wishful thinking on your part, "don't expect progress anytime soon"? You said to much, it should have concluded with "don't expect progress anytime . . "
- e065702
February 15, 2011 at 8:12am
Forgive (or not) my cynicism on this. It may just be time to let the states deal with their own problems free from feeding at the Federal trough. If they don't want to raise the revenue, so be it but let's end the massive transfer payments once and for all.
- agoldhammer@yahoo.com-old
February 15, 2011 at 9:02am
I live in Arizona. We have two problems (many more, but two that are fairly salient to this article). 1. Our voter base largely rejects taxation as a means to long-term economic prosperity. I must be fair - the voters here did approve a temporary 1% increase in sales tax and it's one of those things where, whatever one thinks of GOP gov Jan Brewer (I don't think much), that may not have passed with a Democratic gov championing it. Nevertheless, all-taxes-kill-growth personality syndrome is a very widespread psychiatric condition hereabouts. 2. We have a state higher-education monopoly called the Arizona Board of Regents which creates the appearance of higher education competition by keeping three enormous, overfunded, hopelessly bloated and wildly inefficient universities entirely economically uncompetitive by allowing them each to operate local monopoly/fiefs in the northern, central and southern regions of the states. They are too big for any meaningful competitor to find a niche, and they do not meaningfully compete with each other. The taxpayers, unfortunately, do not realize what a bad deal they get. Everyone complains for 4-6 years while their kids are in school about the up-front tuition, but no one is paying attention to the fact that they pay vastly more than the cost of an in-state student's tuition, every single year, whether or not they have a child in school (or are in school themselves), by way of their taxes. Either of the largest two universities could be cut in half, with one half kept as a research university and the other converted to a teaching university. Immediately the teaching university would create a 1/3 to 1/2 cost structure savings, in the long run the re-introduction of market forces and competition would re-invigorate the university system and bring down costs. But to the author: the problem with your whole thesis is that state's problems often have causes specific to mis-management of funds by the states themselves. Notice Iceland: it's getting better there. Know why? No one bailed them out. So - as I mentioned, I live in Arizona. I'd like to see higher state taxes (on me, not just on people making more than me, thank you), so long as they were spent wisely. I'd also like to see state-run monopolies unapologetically broken apart so that taxpayers stop getting rap--, ... I mean, "taken to the cleaners". A federal bailout does nothing to help either problem and actually prolongs the underlying causes of both.
- dcwood10
February 15, 2011 at 10:28am
YES! Gosh, it's too bad we extended the Bush tax-cuts, since I believe most states get their tax income as a percentage of people's Federal tax payments. That might have gone some way toward restoring their tax-receipts WITHOUT the horrible action of raising taxes. Mind you, when Illinois raised their tax rate from 3% to 5%, the Republicans condemned it as a "60% TAX INCREASE!" (in tones of horror). Dude, really? 2%? You probably pay more than that for Cable. I would be happy to let the Red States stew in their own anti-tax juices, except it's always the poor and unpriveleged who lose out.
- AllanL5
February 15, 2011 at 10:41am
Nutz writes: " The Republicans have made some serious mistakes when they were in control. Absent minded spending. Failed monitoring of the financial markets. Waging the Afghan war and not restoring security there before wandering off into Iraq and doing the same thing there, costing us trillions and making us unsafe. Reckless tax policies. Ignoring the bottom of the economy to maintain consumer demand while relying incorrectly on the top end to drive the economy (which clearly has not worked at all). A lowered dividend cap gain tax of 15%, diverting investment from small businesses to the stock market. Costly Republican mistakes got us here." Bush's spending was bad, but it was certainly within the realm of understanding. But Obama is spending $1T more per year than Bush, where is it going? What do we get for it? The recovery has "only" spend $360B to date. TARP is breakeven. Where is all the rest going? Bush's tax cuts right after 9/11 made perfect sense. I'd not call that reckless at all. Focusing on the top rather than the bottom is exactly the right thing to do and Obama is doing same. And don't forget, Clinton dropped cap gains from 28% to 20%, making zillionaires even more wealthy and fueling the largest divergence between the have's and have-nots in modern history. There is plenty of blame to go around. Just blaming the republicans is silly.
- seattleeng
February 15, 2011 at 12:05pm
Overall government spending (federal, state, and local) has been increasing at the remarkably consistent rate of roughly $200B/year for the past decade. It actually fell in 2008 and returned to trend in 2009. (See http://krugman.blogs.nytimes.com/2011/02/14/the-great-abdication/.) The reason for the dramatic increase in deficits is almost entirely lost revenue due to the recession. As this article points out, a significant part of the increase in federal spending is aid to states to cover their shortfalls. But that's a role that the federal government should play in a recession--running deficits to keep the economy stimulated and backstop the increased social insurance needs when private spending falls. When the economy is strong, the feds should run surpluses to pay down debt. The real fiscal irresponsibility here still belongs to the previous administration and Republican Congress, which reduced revenue and ran huge deficits even while the economy was in decent shape. As the economy recovers, the revenue situation will improve. Then we should have plans in place to bring the deficit down.
- ramcat
February 15, 2011 at 12:55pm
The states have been too pliant in their negotiations with their unionized workers. Further federal aid will only delay the reckoning that needs to happen, and exacerbate it when it does happen. They are going to have to do some hard bargaining, and to begin moving away from defined benefit to defined contribution pension plans, and to increase retirement age and reform work rules.
- flanjo
February 15, 2011 at 2:44pm
Seattleeng writes: Bush's tax cuts right after 9/11 made perfect sense. I'd not call that reckless at all. Focusing on the top rather than the bottom is exactly the right thing to do And where is the evidence that that worked? Bush's bad job numbers? The increased debt? The crappy economy? Maybe, considerintg the lack of positive effect from the cuts, Bush should have cut taxes and then declared "Mission Accomplished." Blaming the spending after we hit the rocks on Obama is okay only if you blame Bush for 9/11.
- Nusholtz
February 15, 2011 at 6:00pm
ramcat writes: "The reason for the dramatic increase in deficits is almost entirely lost revenue due to the recession." Wrong. Receipts under Bush in '06 through '09 were 2.4, 2.6, 2.5 and 2.1T Receipts under Obama in 10 and 11 are 2.1 and 2.5T. So, in 2011, Obama has the same receipts as Bush (constant dollars). And 2010 was down $400B. Bush's outlay in '07 was $2.7T. In '08 (his biggest year) is was $3.0T (presumably due to TARP). Obama's outlays: 2009: $3.5T 2010: $3.7T 2011: $3.8T 2012: $3.7T So, Obama has about the same receipts as Bush in 2007 and 2008. But in 2010 and 2012, will have outlays that are $700B and $800B higher than Bush EVEN DURING BUSH's TARP year. http://www.presidency.ucsb.edu/data/budget.php
- seattleeng
February 15, 2011 at 8:38pm
GWB pushes US over the cliff and his supporters blame US because we can't fly.
- rayward
February 15, 2011 at 9:59pm
seattle, I'm talking about overall government spending and revenue, not just federal. Overall government spending is growing more or less on its pre-crisis trend, but revenue has fallen dramatically. Revenue has started to recover now, but it's way lower than it would have been with no crisis. Spending is about where we'd expect with no crisis (http://krugman.blogs.nytimes.com/2010/10/17/why-have-deficits-exploded/). Federal spending is up largely due to recession-driven safety net spending (unemployment insurance and Medicaid) and aid to states.
- ramcat
February 16, 2011 at 12:27pm