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More Deficit Dilemmas

Jan 23, 2011 • Economic Debates, Government, Labor • 188 Views    No Comments

We could say that what you solve depends on what you see. When told about ballooning state deficits, people first see big numbers. Their response? Let’s cut spending. According to polls, though, when asked yes or no about cutting specific programs, most of us say no, we can’t cut schools, or libraries, or ……just about anything.

By contrast, our cities see potential bankruptcy and states see default (because, as sovereign entities, they cannot declare bankruptcy). A paper from The Brookings Institute suggests that our leaders look at California and the Intermountain West for insight about the “colossal challenges” facing most states.

Presenting specific examples from California, Colorado and Nevada with more of a focus on Arizona, Brookings tells us that we have had a catastrophic convergence of politics, deficits, and demographics. The paper is unique because it displays how very different conditions from state to state could have created the same dismal results.

1) It all began with “…a growth cycle that produces rising income tax revenues that in turn lead to tax cuts.

2) Meanwhile we had, “…healthy revenues that convince the public to mandate spending increases…”

3) Add to that “a growing population that needs to be served by program expansion” and you get a recipe for disaster when the boom turns to bust.

Only one state is cited in the paper for political leadership that made wise fiscal decisions during good times and bad. More about that state and solutions, tomorrow.

The Economic Lesson

Economists call the recession’s impact on state budgets “cyclical” because its origin is the business cycle. A cyclical impact includes less tax revenue because of unemployment and added spending that social services require. Cyclical deficits disappear when the economy expands.

The second type of spending is “structural.” Ongoing, structural obligations reflect a fundamental imbalance between revenue and spending whether the economy is expanding or contracting. They refer to spending that is a continuing promise such as government employees’ pensions or educational mandates.

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