The Agenda

On the Spendthrift States

Ezra Klein believes that states shouldn’t be blamed for the marked deterioration of their budgets during the downturn. 

 

The main argument against state and local aid has been something of a they-made-your-bed take on the matter. “It’s a bad idea to bail out states from making the necessary decisions they need to make to increase and fix their structural deficit problems,” Rep. Paul Ryan told me Thursday.

And it’s true that state budgets aren’t perfect, and in some cases are quite bad. 

So far, I agree with Ezra. The states varied considerably in how they handled their budgets. Among the quite bad cases are Arizona, Florida, and Nevada, as Nicole Gelinas argued in City Journal. Josh Barro has highlighted the budget woes in Illinois and California, as well as the structural problems afflicting almost all state governments. We can easily add New Jersey and New York and Pennsylvania to the list of states that have done an egregiously bad job of managing their state budgets. Suffice it to say, we’re now taking about quite bad budget practices that are impacting a nontrivial share of the total U.S. population.

Ezra continues with:

 

States had record rainy-day reserves in the run-up to the crisis. That’s pretty fiscally responsible. It’s just that the crisis is the worst economic catastrophe since the Great Depression. You wouldn’t want states budgeting for once-every-80-years economic storms. That’d mean keeping a lot of cash sitting around that could be more productively used for other things. And we don’t want states deficit spending, or at least we seem to not want that.

But that means they need some help from the federal government — which does have the tools to survive these storms — when these crises do strike.

Fortunately, my sense is that there is a broad consensus on this question: conservatives, including a large number of Republican lawmakers, accept the idea that there should be some help from the federal government. Yet those on the right tend to prefer conditional assistance. 

The fact that states had record rainy-day reserves doesn’t tell us much about the broader sustainability question, not least because state governments, like the federal government, face ballooning costs associated with an aging population. What we do know is that state government expenditures have grown at a rate of 6 percent per year over the last decade, a rate that far outstrips overall economic growth and wage growth.

You can hardly blame Nevada and Florida for not managing global capital flows and Wall Street’s risk-load. And the fact that pretty much all of the states fell apart at once — save for a few that rely heavily on energy industries — suggests this isn’t a governance problem. It’s a global economy problem.

It is also true, of course, that the deteriorating labor market position of less-skilled workers is also a global economy problem. While it might be unfair to expect states to reform their budgets in light of the global economic environment, it’s not clear to me that fairness is the relevant criterion for determining how we should proceed. A better question to ask, in my view, is whether state budgets are well-suited to meeting the economic challenges U.S. households will face in the next few decades. That is at the heart of the case for aggressive structural reform. 

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