STATES OF DISTRESS

January 27, 2009

When Detroit's auto makers begged for a federal bailout last month, Congress demanded that their CEOs make changes to their operating model.  If only Congress would demand the same from the state and local politicians now seeking $200 billion from federal taxpayers, says the Wall Street Journal.

President Obama has announced that a big check to state governments is part of his stimulus spending plan in order to "save the public sector jobs of teachers, police officers, firefighters, and others who provide vital services."  But the states aren't innocent victims, says the Journal.  Their revenues have collapsed of late, but the main reason so many states are broke today is because lawmakers thought the days of living well would last forever.

The state spending binge of the last five years has been almost unprecedented in American history, says the Journal:

  • Since 1998 state and local budgets have nearly doubled to $2 trillion.
  • State and local expenditures rose 34 percent from 2003-2007 compared to inflation of 19 percent and population growth of 5 percent.
  • They also loaded up on debt, which doubled to $2.23 trillion in 2008 from $1.14 trillion in 1998.

The states with the biggest include:

  • California with $40 billion -- thanks to a 40 percent increase in spending over the last five years.
  • Arizona, Florida and Nevada also have deficits of roughly 20 percent of their operating budget.
  • New York is confronting an estimated $12 billion deficit, but the state would have a $5 billion surplus if it simply cut its spending to the 50-state norm.

A federal bailout for these distressed states means redistributing income to these big spenders from the most fiscally responsible states.  Federal aid also creates a disconnect between the people who pay for the local services and those who benefit from them, creating an incentive for states to pad their budgets.

So, if Congress does provide aid, it's time to insist on new budget rules, says the Journal.  States should be required to pass constitutional spending limits.  If states had restrained their spending to inflation and population growth over the past decade, they wouldn't have record deficits today, says the Journal.

Source: Editorial, "States of Distress," Wall Street Journal, January 26, 2009.

For text:

http://online.wsj.com/article/SB123292993332813959.html

 

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