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Contrast how the best-run U.S. states are responding to the
recession -- cutting services, laying off workers, raising taxes, and
generally making hard choices -- with how the Federal government simply
writes checks to any and all (while being praised for its
"flexibility" and "creativity") and you begin to
understand the power of a printing press.
States, like all governments prior to the invention of fiat
currency, have to deal with a fixed quantity of wealth that can be divided up
but not increased in the short run. They're like families, in other words,
trying to live on a more-or-less stable income and reluctantly giving up
low-priority activities in hard times. But a national government with a fiat
currency doesn't face these limitations. It just creates as much new paper as
necessary to continue all its normal activities.
So it's no surprise that the worst-run states are becoming
increasingly dependent on federal help, just as a family facing hard times
turns to a rich uncle for a loan. But rich uncles can attach all kinds of
strings that end up making things even worse. Saturday's Wall Street Journal
carries an opinion piece showing just how much worse:
The States and the Stimulus
How a supposed boon has become a fiscal burden.
Remember how $200 billion in federal stimulus cash was supposed
to save the states from fiscal calamity? Well, hold on to your paychecks,
because a big story of 2010 will be how all that free money has set the
states up for an even bigger mess this year and into the future.
The combined deficits of the states for 2010 and 2011 could hit
$260 billion, according to a survey by the liberal Center on Budget and
Policy Priorities. Ten states have a deficit, relative to the size of their
expenditures, as bleak as that of near-bankrupt California. The Golden State starts
the year another $6 billion in arrears despite a large income and sales tax
hike last year. New York is literally down to its last dollar. Revenues are
down, to be sure, but in several ways the stimulus has also made things
worse.
First, in most state capitals the stimulus enticed state
lawmakers to spend on new programs rather than adjusting to lean times. They
added health and welfare benefits and child care programs. Now they have to
pay for those additions with their own state's money.
For example, the stimulus offered $80 billion for Medicaid to
cover health-care costs for unemployed workers and single workers without
kids. But in 2011 most of that extra federal Medicaid money vanishes. Then
states will have one million more people on Medicaid with no money to pay for
it.
A few governors, such as Mitch Daniels of Indiana and Rick Perry
of Texas, had the foresight to turn down their share of the $7 billion for
unemployment insurance, realizing that once the federal funds run out,
benefits would be unpayable. "One of the smartest decisions we
made," says Mr. Daniels. Many governors now probably wish they had done
the same.
Second, stimulus dollars came with strings attached that are now
causing enormous budget headaches. Many environmental grants have matching
requirements, so to get a federal dollar, states and cities had to spend a
dollar even when they were facing huge deficits. The new construction
projects built with federal funds also have federal Davis-Bacon wage
requirements that raise state building costs to pay inflated union salaries.
Worst of all, at the behest of the public employee unions,
Congress imposed "maintenance of effort" spending requirements on
states. These federal laws prohibit state legislatures from cutting spending
on 15 programs, from road building to welfare, if the state took even a
dollar of stimulus cash for these purposes.
One provision prohibits states from cutting Medicaid benefits or
eligibility below levels in effect on July 1, 2008. That date, not
coincidentally, was the peak of the last economic cycle when states were
awash in revenue. State spending soared at a nearly 8% annual rate from
2004-2008, far faster than inflation and population growth, and liberals want
to keep funding at that level.
A study by the Evergreen Freedom Foundation in Seattle found
that "because Washington state lawmakers accepted $820 million in
education stimulus dollars, only 9 percent of the state's $6.8 billion K-12
budget is eligible for reductions in fiscal year 2010 or 2011." More
than 85% of Washington state's Medicaid budget is exempt from cuts and nearly
75% of college funding is off the table. It's bad enough that Congress can't
balance its own budget, but now it is making it nearly impossible for states
to balance theirs.
These spending requirements come when state revenues are on a
downward spiral. State revenues declined by more than 10% in 2009, and tax
collections are expected to be flat at best in 2010. In Indiana, nominal
revenues in 2011 may be lower than in 2006. Arizona's revenues are expected
to be lower this year than they were in 2004. Some states don't expect to
regain their 2007 revenue peak until 2012.
So when states should be reducing outlays to match a new normal
of lower revenue collections, federal stimulus rules mean many states will
have little choice but to raise taxes to meet their constitutional balanced
budget requirements. Thank you, Nancy Pelosi.
This is the opposite of what the White House and Congress
claimed when they said the stimulus funds would prevent economically harmful
state tax increases. In 2009, 10 states raised income or sales taxes, and
another 15 introduced new fees on everything from beer to cellphone ringers
to hunting and fishing. The states pocketed the federal money and raised
taxes anyway.
Now, in an election year, Congress wants to pass another $100
billion aid package for ailing states to sustain the mess the first stimulus
helped to create. Governors would be smarter to unite and tell Congress to
keep the money and mandates, and let the states adjust to the new reality of
lower revenues. Meanwhile, Mr. Perry and other governors who warned that the
stimulus would have precisely this effect can consider themselves vindicated.
John
Rubino
DollarCollapse.com
Also
by John Rubino
John
Rubino is co-author, with GoldMoney’s James Turk, of The Collapse of the
Dollar and How to Profit From It (Doubleday, 2007), and author of Clean
Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit
from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall
Street (Morrow, 1998). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with
TheStreet.com and a frequent contributor to Individual Investor, Online
Investor, and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and
GreenStockInvesting.com.
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