Why Fiscal Sanity Matters

The New York Times has a piece on why fiscal crises in the states are harming the national economy. Because of years of indescriminate spending in many states, nearly every state in the union is seeing massive budget deficits. The deficit of California alone is larger than the entirety of most state budgets.

The numbers are hard to add up, but even the most optimistic accounting has state spending slowing sharply while tax rates rise along with a variety of fees. Just three years ago, the states were still a plus for the economy. While the private sector had begun to limp, state spending had remained strong and so had revenues, despite cuts in tax rates in several states.

Today the opposite is happening, and that makes the states a net minus for the national economy. Without that reversal, some economists say, the economy would probably be growing at an annual rate of more than 3 percent, enough to create jobs rather than eliminate them.

"It is reasonable to think that the response by the states to the fiscal crisis is taking at least half a percentage point out of the growth rate of the national economy," said Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities in Washington. The annual growth rate has averaged 2.6 percent for the last 15 months.

The reasons for these budget problems are simple: states spend far more money than they were taking in. They took tobacco settlement money and spend it on program unrelated to public health. They created massive increases in entitlement programs. They threw money into boondoggle programs like Minnesota’s light rail network or other high-cost programs that counted on fat surpluses into state coffers.

The the dot.com bubble burst, the September 11 attacks added a double whammy, and concerns over Iraq and world oil markets further spooked the markets. The states found themselves carrying hundreds of programs they couldn’t pay for. Their drunken orgies of spending caught up with them with one hell of a financial hangover.

In true NYT fashion, guess who is effected the most?

The cuts in state spending are just starting to be felt, with the impact landing disproportionately on the poor. "We have been shifting a lot of spending for social services from the feds to the states," said Robert M. Solow, an economist at the Massachusetts Institute of Technology and a Nobel laureate. "And that means the cuts that are taking place are hurting people at the bottom of the income distribution."

Actually, research has shown that unfunded mandates from the federal government make up only a small fraction of state budgets, but that’s largely besides the point. The overall argument is valid – because states have to cut their budgets, it’s only logical that those who are more dependent on state services will be the hardest hit.

However, there’s one state that doesn’t have to cut social services to balance the budget. There’s one state where there’s no crisis over the budget and where social services have remained stable.

That state is Colorado.

So what makes us so special? We demanded, and got, TABOR. It’s the Taxpayer’s Bill of Rights, and it passed by voter initiative here back in 1992. What TABOR did was to cap – really, tightly cap – the growth of our state government. Not only does it mandate that any budget surplus be refunded to the taxpayers, it also limits all future increases in government spending to any increase in population plus inflation.

Under the Colorado TABOR system, government cannot grow past the rate of inflation. Any surpluses are immediately returned to taxpayers that year. If there’s a pressing need for additional spending, it has to approved by the voters. (Who approved an increase in public school funding in 2001.) It’s a system that ensures thet the people of Colorado have a direct economic incentive for keeping budgets in control.

At the same time, it means that social services in Colorado are stable, and programs aren’t growing out of control in fat times and getting dramatically cut in hard times. Recipients of state programs in Colorado have a sense of stability that doesn’t exist in California or even Minnesota.

Right now, Colorado is an island of fiscal stability and sanity in a sea of economic distress. While Colorado votes get rebate checks and stable social services, other states are raising taxes or cutting services, and oftentimes both.

TABOR is an example of how simple principles of fiscal sanity can help taxpayers of all stripes – even the poorest taxpayers. Fiscal restraint ensures that the wild fluctuations of the budget that other states are seeing won’t happen. Moreover, everyone gets a nice rebate check at the end of the year. Of course, that means that politicians can’t bribe people with extravagant spending programs for certain groups. It’s another case where common sense needs to trump politics in order to serve the public good.

6 thoughts on “Why Fiscal Sanity Matters

  1. Aren’t you the same guy who just yesterday said that deficits don’t matter because economic development always solves the problem with surging revenues? What has happened since yesterday for you to do a complete aboutface on that position?

  2. It’s a difference in scale. The federal budget is generally more resilient than state budgets, and reacts differently to economic stimulus. States don’t have to fight wars, and they don’t have the leverage in economic stimulus than the federal government does. Plus, the federal government has far more ability to borrow than state governments do.

    Deficits do matter, but it’s a matter of priority. On the federal level the priority needs to be fighting the war on terror and creating economic stimulus. However, the federal government does need to cut spending as well – although the political pressures at the federal level make a national TABOR system unlikely in the extreme. The priorities for states are more along the lines of creating a positive climate for business and maintaining essential services. Colorado’s TABOR system has done an excellent job of providing for both.

  3. I get it now. Federal deficits aren’t important because George Bush and a Republican Congress are running them up. Funny, federal deficits and a Balanced Budget Amendment to the Constitution were the foremost GOP priority back in the Contract with America days, which seems downright moderate compared to the party line eight years later. But then again, federal deficits ceased to be a concern for the Contract with America crowd on January 2001.

    As for the federal government having to fight wars and the states not, one major part of the state and local governments current budget woes is that they have to spend millions of dollars every time Tom Ridge raises the alert level to “Code Orange” on his terrorism mood ring. In the end, the war on terrorism is probably costing the states and cities more per capita than it is the federal government, even though they don’t have the luxury of running perennial deficits year after year while passing one tax cut after another.

    I can remember a time not so long ago when Republicans used to herald the genius of state and local government as being so much more equipped to handle spending issues than the federal government. Now, when it’s been proven that they’re not, the Republicans have made the states and local governments out to be the most reckless free-spending loonies the nation has ever seen. Just another example of the aimless zigging and zagging conservative ideology must employ to save the face of their erroneous worldview. Even World War II kamikaze pilots would blush when witnessing how disorganized conservative rhetoric has become.

  4. Again, studies have shown that unfunded mandates from the federal level have a negligable effect on state budgets – and had the states excercised some financial prudence they would have had the ability to deal with security issues. Had California enacted TABOR legislation they would currently be running a $20 billion surplus.

    On the federal level, there have been measures such as PAYGO budgeting and the Budget Enforcement Act that have helped considerably. The problem is that the political pressure on the federal government essentially means that cutting spending goes over as well as a fart in church. They only way to have a working system like TABOR in the federal level is to reform the entire budget process. Most of federal spending is contained in mandatory expenditres like Social Security, Medicare, and interest payments. Unfortunately, there’s about the same chance of that as the Pope becoming Lutheran.

  5. It’s pretty tough to figure out a scenario where California would have a $20 billion surplus right now since Pete Wilson paved the way for Texas energy barons to rob Californians blind through the deregulation scam. The states did go on both a spending and tax cutting spree in the 1990’s that is coming back to bite them on the ass now that revenue is down and expenses are up, but the problem isn’t as aligned with fiscal recklessness by the statehouses as you guys would like us to believe. And as the federal government defers more and more funding responsibility to the states and then insinuates that they don’t have any semblance of fiscal discipline after dumping new mandates on them.

    It’s a clever, if wildly fraudulent and inconsistent strategy….first put the state gov’ts on a pedestal for their superb stewardship of their budgets and know-how on where to allocate the money for maximum efficiency at the “local level,” using that as an excuse to defer as much responsibility as possible to them. Then, you guys to wag your righteous fingers at them for spending with reckless abandon the second the feds give them more than they chew and thus use their authority to condemn and trivialize the states who play by an entirely different set of budgetary rules.

  6. If I recall, it was Bush who was governor of Texas since, oh, 1995, and now Texas is suffering budget shortfalls as bad as those in California. Is that his fault, or Clinton’s?

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