NCPA - National Center for Policy Analysis

Amid Budget Shortfalls, States Should Emulate Businesses

December 23, 2002

When corporations foresee periods of red ink ahead, they tighten their belts, downsize and try to shore up their bottom line. Some savvy economists advise states to do the same. Some 31 states face budget shortfalls totaling a combined $17.5 billion for fiscal 2003 -- in part due to declining tax revenues and heavy spending from years past.

Were states to take a lesson from the private sector, they would see their present crises as an opportunity to strengthen their future performance, some economists advise. Michigan's response to the 1991 recession provides a model.

  • When that state's governor, John Engler (R), took office that year, the state was mired in recession and facing a $1.8 billion deficit.
  • Engler lopped off an entire state department, cut the number of state employees by 5,000, terminated a welfare program that provided benefits for 80,000 people and pushed through a series of tax cuts.
  • Partly as a result of these brutal measures, Michigan's economy boomed -- unemployment plunged, and per capita incomes, which began the 1990s 2.9 percent below the national average, soared to 2.8 percent above the national average by 1995, according to the consulting firm, Global Insight Inc.
  • But not all economists agree that Michigan's policies will work for all other states and they note that Michigan was not immune to economic weaknesses later.

Still, more efficient and productive governments could set the stage for faster growth when the economic turnaround does occur.

Source: Patrick Barta, "The Outlook: State Budget Crises Help the Economy? Some Say They Could," Wall Street Journal, December 23, 2002.

 

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