The Economist has an insightful analysis of the way the states’ budget crises are playing out on the national stage.
IN STATE capitals across America, there is only one story in town: the disaster facing state budgets. According to the National Conference of State Legislatures, states face revenue shortfalls totalling $21.5 billion this fiscal year, which ends in June - 23% more than they thought in November. Barely a day goes by but local newspapers report a new cut in services.
Back in Washington, the administration seems about as concerned as it would be by a budget deficit in France. In his original proposal for next year’s federal budget, President Bush asked Congress for no extra aid to the states (though the deal struck in Congress this week would provide $20 billion, at the Senate’s suggestion).
Worse, the administration has piled new obligations on state and local governments without providing the money for them.
The response of conservatives has generally been to say that the budget crisis is simply an illusion, the result of free-spending days during the boom years. Robert Barro’s assessment seems indicative:
Look, I don’t think you can think about the state government crisis by cutting into it in 2002, 2003. You have to look at what happened earlier. The fact is there was a boom in the economy starting in the mid-’90s, a high tech boom which particularly resulted in a tremendous in-flow of capital gains revenue. That was the main factor behind the federal surplus growing throughout the ’90s, and it was the main factor about the state governments having so much money to spend, and most of the state governments spent it with great eagerness. So I think they created the crisis.
The diagnosis is not wrong, but from a macro-economic view, I’m not sure why one would simply accept a major collapse of aggregate demand at a time of recessionary pressures on the economy. Private-sector investment had a lot to do with irresponsible decisions made during the boom, but that doesn’t mean we’re not missing its role in creating jobs right now. We can’t do much about private investment decisions, but we can do something to keep states from slashing payrolls and raising sales taxes. The role of national fiscal policy should be to smooth over shortfalls when it can instead of risking the nation’s economic health to try to enforce your idea of the proper size of state government.
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