A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.
That is the beginning of a new report by Iris Lav and Elizabeth McNichol of the Center on Budget and Policy Priorities.
A lot of people in policy circles like to draw a distinction between the short and the long run. For some, the idea is that the long run is when we should deal with fiscal problems, but in the short run, we can’t afford not to spend. In my view, this allows people to appear sober-minded about the long-run fiscal problems of the states while endorsing more reckless decisions today.
This is an old idea (“in the long run we are all dead,” said Keynes, dismissively). But I think it has become increasingly dangerous. Politicians have every incentive in the world to think about today and very little incentive to worry about tomorrow (and according to the GAO, the states’ long-run problems are quite significant, requiring spending cuts or revenue increases of 12.3 percent, sustained for the next 50 years).
A few months back, I wrote a paper examining the factors that contributed to large state budget gaps during the Great Recession (I actually used CBPP’s data on the size of the gaps). Among other things, I found that the size of a state’s gap in FY2010 was positively related to per capita spending growth over the 2 decades that preceded the recession. I take this as some evidence that the short and the long-run are pretty tightly-connected and a failure to focus on fiscal problems in the short run can manifest itself in pretty serious problems over the long haul.