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State Finance

Dec 6, 2010 • Government, Households, Thinking Economically • 210 Views    No Comments

Which state postponed a pension fund payment of $3.1 billion because of big budget problems and had a 2.4% decrease in its real GDP? (Still though, this state has the second highest median income.)

The answer? New Jersey.

New Jersey, though, is not alone. Jon Stewart told us that Arizona had to sell its statehouse (which included the governor’s office). A potential California default was the prototype for an Economist simulation. Illinois borrowed money to fund its pension obligations and then had to borrow money to repay the original loan.

According to a Pew study on state financial problems, “Most Americans (58%) say the states should fix their own budget problems by raising taxes or cutting services.” But, “…large majorities oppose…” cutting major spending categories which include education, pubic safety (police and fire), and health care.

Perhaps the reason for the contradiction is opportunity cost. The individual opportunity cost of cuts is far different from the statewide cost.

The Economic Lesson

Looking at a BEA map of state economic growth during 2009 provides a snapshot of state health. Oklahoma is at the top (+6.6%) and Nevada, the bottom (-6.4%). For the GDP of individual states, agriculture, forestry, fishing, hunting, and mining fueled growth. On the minus side, less durable goods production (goods lasting longer than 3 years) and construction diminished economic activity.

Composed of gross investment (primarily business purchases and residential housing), consumer spending, government spending, and exports minus imports, the GDP is a yardstick of the value of goods and services production.

 

 

 

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