Having wasted their substance with riotous spending, the prodigal governors have come not to their senses but to Washington. But let’s spare that fatted calf.
American politics is too often the art of bribing the people with their own money. It’s a neat trick and easier to pull off when you have the ability to borrow tons of money — literally tons, if you put it into $100 bills and weighed it — with which to reward loyal supporters and entice new ones. The federal government is guilty enough in its own right, but to subsidize that practice in the 50 fiefdoms subordinate to it will only encourage further recklessness from Albany to Sacramento. It would also further undermine the economy by creating yet more uncertainty in the financial markets.
The states have been on a spending jag, and now that the bills are coming due, Washington is hosting a parade of governors led by Arnold Schwarzenegger, who has demanded that the federal bursars “get off of their rigid ideologies” and write him a check for a couple dozen billion dollars. Tellingly, he compares the state of California to an “accident victim on the side of the road that is bleeding to death.” But this was no accident. Who was behind the wheel, governor?
California’s projected budget deficit over the next 20 months is about $28 billion, or 26 percent of the state’s budget. Since taking over from Gray Davis, who didn’t exactly set the gold standard of fiscal discipline, Schwarzenegger has steered the state into a 40-percent increase in spending, some $41 billion a year. Arithmetically inclined readers may calculate that California’s spending increase under Schwarzenegger and the usual spendthrift Democrats in the legislature is a greater sum than the projected shortfall. Which is to say, if only Californians could return to the Gray Davis version of fiscal discipline, they’d be in the black. But spending under Schwarzenegger has grown at twice the rate it did under Davis. If this is the alternative, give us that old-time rigid ideology, the one that says Republicans were put on this Earth with a mandate to cut spending and lower taxes.
Instead of looking to Washington for a handout, the prodigal governors should look to their more prudent brothers, such as Gov. Rick Perry of Texas. Noting on Tuesday that Texas currently enjoys a budget surplus, Governor Perry laid out his state’s formula for success: “Texas has created a business-friendly environment where 1,000 people a day move to our state to work and raise a family.” Montana’s Democratic governor, Brian Schweitzer, is no captive to conservative ideology, but he stewards a surplus as well, helped along by Republicans in the state senate. Even in Alaska, where 90 percent of the state’s revenue depends in some part on oil, the price of which has this year fallen by two-thirds, Governor Palin is managing admirably. Raising Wyoming’s taxes to subsidize Californians’ extravagance violates both prudence and federalism; we have 50 different states for a reason.
Governor Schwarzenegger’s proposed package of tax hikes and Keynesian stimulus merely reformulates the feeble for the consumption of the credulous. But while hiking taxes or cutting spending during a recession is not normally the preferred prescription, the ill effects of doing so would be less destructive, immediately and in the long run, than those of declaring California a ward of the federal government. Steep tax hikes may not even be necessary: It is hard to believe that scaling back California’s spending to Davis-era levels would prove insufferably austere. Better a spending shock than federal receivership.
Washington should be mindful of the chaotic effect that a bailout of the states would have on the economy. One of the reasons the financial markets are in turmoil is that investors are having a hard time deciding how to price risk, which is to say they’re having trouble deciding how great a return they should demand in exchange for the risk that they will lose money when they invest in bonds and other securities. One of the main sources of this uncertainty is the federal government itself.
The unpredictable and often irresponsible actions of the government enabled, among other things, the proliferation of dodgy mortgage-backed securities through Fannie Mae and Freddie Mac. An implicit federal guarantee of state debt will have precisely the same effect as the implicit federal guarantee of Fannie Mae’s debt: artificially lowering the cost of credit, subsidizing excessive risk-taking, encouraging yet more irresponsible spending and borrowing. And note this well: The federal government’s ability to absorb the cost of these shenanigans is limited. To exceed that limit invites economic catastrophe.
If spending cuts prove insufficient and a few states are forced to restructure their debt, the markets will penalize those states in an appropriate fashion by making it more expensive for them to borrow money in the future. This will be a good thing, just as it is a good thing in the long run that certain Wall Street operators are going to find it cumbrous and costly to borrow more money than they can ever credibly hope to repay. If there is too much risk in the system, the best way to wring it out is to let the market put a price on it. If that means that poorly governed states have to enter unpleasant negotiations with their creditors, that is the price they have to pay. It’s time for our public servants to come to their senses.