There is no denying it any longer; the current budget crisis has pushed many states to the very brink. Jobs are being cut, taxes are being raised, and I.O.U.'s are back on the table. There are a number of potential causes for the current turmoil, both internal and external to the states themselves (depending on who you ask). That is the tricky thing about economics; there are a great number of explanations for any given event, and even economists cannot usually agree on the definite cause.

One thing is clear; states have been spending, and spending, and spending. The money supply grows over time, sure. States populations have gotten bigger and required more spending to maintain the same per-capita level of services, sure. The politically moderate from both sides of the aisle can probably agree that it is reasonable for state spending to grow over time such that it roughly keeps up with inflation and population growth (thus keeping the real, per-capita level of state spending unchanged). This, however, is not what pushed the states to a situation that has politicos across the country trying to table the bankruptcy option.

The fact is, spending by state governments began to outstrip inflation and population growth around the year 2000 and never looked back. Each year, states spend more and more on operations, programs, and welfare benefits. States were able to sustain this binge throughout the 1990s and 2000s because the economy was humming along nicely. A healthy economy swelled states' coffers (helping to balance their general funds), and an optimistic market created an all too willing source for states to borrow from. In some sense then, the financial crash of 2008 and ensuing recession brought about the state budget crisis so prevalent in headlines these days.

One has to realize however, that with state spending outstripping inflation and population growth every year, a collision like the one we are seeing now was inevitable. The levels of spending by state governments (ignoring the pension disaster entirely) were completely unsustainable because government was growing faster than the economy. If there had never been a crash in 2008 and if Lehman Brothers were still sitting pretty, a state meltdown like today's would still have occurred someday. In a very real sense then, all the 2008 crash did was pull the curtain on a disaster waiting to happen.

The policies that give rise to the budget deficits of today were set into motion long ago. In that sense, the dire situation states find themselves in creates a golden opportunity for crafting budget policies that will work tomorrow. States have created programs and whole agencies that overstep the core functions of government; these have got to go. If lawmakers don't take advantage of the chance to reform state government when they have all the weight of necessity on their side, they never will.

Make no mistake, the revisions and realignments that need to be made by state governments are not easy, and not everybody wins. Some people are going to feel the pain much more than others. Though public sector unions have played a large role in the swelling of state governments, it certainly is not the case that every government employee or welfare recipient that is going to feel the pain of budget cuts asked for the expansions in the first place. People have been benefiting from programs and departmental budgets that they didn't necessarily ask for. Real people are going to get hurt in this ugly but necessary process, and we would do well to remember that.

 

Filed Under : Spending Cuts

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