Tag Archives: budget deficits

Stimulus II: Just Say No

Congress is, incredibly, considering a second stimulus. The reason: it needs to help states with the problems it helped exacerbate with the first stimulus, as the Wall Street Journal notes. (Hat tip: Matt Welch Reason Hit and Run).

The WSJ explains, gaping state budget deficits were not filled and fixed, but made deeper with federal dollars. States have expanded programs with money due to evaporate in 2011. Acceptance of federal money also means states surrender budgetary control.

The Evergreen Freedom Foundation finds when Washington state accepted $820 million in education stimulus money it effectively insulated all but 9 percent of its $6.8 billion K-12 budget from cuts in 2011-2012. On top of this, nearly 85% of Washington’s Medicaid budget is exempt from cuts, as is 75% of its college funding. The upshot is states now have to scramble to raise revenues to support the spending the federal government imposed with the 2009 stimulus; or, make even larger cuts.

Some governors had the foresight to reject parts of the stimulus. Indiana Governor Mitch Daniels and Texas Governor Rick Perry said no to expanding unemployment benefits.  It was the right move. Expanded benefits mean more state spending on unemployment benefits. Spending that is ultimately passed on to businesses via payroll taxes that depress hiring and wages.

In effect, stimulus spending is accomplishing the reverse of its intent which was to stabilize state budgets, stimulate job creation, and economic recovery. What the stimulus does demonstrate nicely is the dynamics of interventionism, developed by economist Sanford Ikeda.

As Richard Ebeling describes it, when policymakers intervene into markets, markets get out of balance- generating surpluses, shortages, creating  losses or diminished profits, leading to misemployed resources. Rather than reject the intervention policymakers make a case for more interventions to address these  “market failures.”

This  process can continue for quite some time until it becomes unsustainable. Considering the U.S. has  been down this interventionist road for several decades, the real outcome of the never ending bailout  may be to discover our point of financial exhaustion.

New Study “Institutions Matter: Can New Jersey Reverse Course?”

The Mercatus Center at George Mason University is releasing a new study, “Institutions Matter: Can New Jersey Reverse Course?”

Authored by myself and Mercatus colleage, Frederic Sautet, the paper examines the history of the public sector in New Jersey, including the relationships between the federal, state, and local governments, discussing how the loss of the “old time fiscal religion” has resulted in unmanageable budget deficits and a weakened state economy.

Years of spending growth, increasing mandates, and expanding use of intergovernmental aid and debt have inflated the size and cost of government, leading to dramatic increases in taxation at all levels. Leaving the state in the midst of the worst fiscal and economic crisis in its history.

Right-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet. New Jersey FlagWe find that the state’s recovery hinges on reforming rules for taxing and spending — in short, re-establishing fiscal prudence, and reducing the size and scope of government.

Namely, we recommend the state government:

We will continue to follow the fiscal condition of the state in the coming year through the project’s website,  and our blog, Neighborhood Effects.  A pdf version of the study can be found here.

Experiments in Democracy

A Wall Street Journal editorial discusses the severity of the budget crises in three states: California, New Jersey, and New York.  While all states are suffering decreased revenues this fiscal year, the problems in these states have been especially severe, resulting in possible downgrades for California’s bonds which are already the lowest-rated in the country.

The Journal states:

A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

During booms in the business cycle, high tax rates accompanied by an increased level of government services are palatable to taxpayers, but as these three cases exhibit, high-tax policies can quickly become unsustainable as incomes fall.

Eileen’s last post explains that state and municipal policy makers including Rudolph Giuliani are currently discussing reforms toward greater fiscal responsibility in order to promote prosperity in their localities, but these reforms are going to be difficult to enact for states that are already deeply indebted.

A great asset of the American federal system is that policy variation across the states allows citizens and law makers to observe how various fiscal policies function in the real world.  As described by the authors of the newly published 2009 edition of Rich States, Poor States, constituents do in fact “vote with their feet” by moving to states with policies that fit their desires.  This year’s index demonstrates that states in the South and West are generally gaining domestic population from the Northeast where taxes and government involvement in the economy are generally higher.

Unfortunately, the same experimentation at the federal level carries much greater costs.  Until now, federal aid has allowed for irresponsible fiscal policies to continue at the state level, but this policy may be coming to an end.  If the federal debt and deficit approach the unsustainable levels that states such as California, New Jersey, and New York have reached, no entity will be able to bail it out.  Additionally, economic policies at the federal level do not provide the same sort of natural experiment within the country and carry a higher risk of severe negative consequences.

The article continues:

At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

While government systems can never incorporate the feedback mechanisms of the market, the federalist system allows for a sort of competition between states and localities in which competition allows successful programs to thrive and spread. However, this system only works when unsuccessful local policies are not subsidized by the federal government and when authority is sufficiently devolved to allow states to differentiate their policies from one another’s.

Desperately Seeking Revenues

Dwindling revenues and budget deficits are leading lots of municipalities in search of revenue enhancements – i.e. tickets, fees and fines. California’s “fix-it” ticket has tripled: It will cost you $100 for a broken headlight.

Thomas Garrett and Gary Wagner, looking at North Carolina data, find that the number of citations issued go up in years following a drop in revenues. The bad news seems to be that governments get hooked: Garrett and Wagner find that the rate of ticket issuance does not decline when revenues rebound.

Elsewhere, my colleague Thomas Stratmann and Michael Makowsky of Towson University have a forthcoming paper in the American Economic Review that shows that when it comes to traffic tickets, the incentives faced by officers really matter:

The farther the residence of a driver from the municipality where the ticket could be contested, the higher is the likelihood of a fine and the larger its amount. The probability of a fine issued by a local officer is higher in towns when constraints on increasing property taxes are binding, the property tax base is lower, and the town is less dependent on revenues from tourism. For state troopers, who are not employed by the local, but rather the state government, we do not find evidence that the likelihood of traffic fines varies with town characteristics. Finally, personal characteristics, such as gender and race, are among the determinants of traffic fines.

Putting these two papers together suggests that states and municipalities will be looking to increase revenue collections from out-of-area motorists. Interestingly, this is the opposite approach taken by Virginia, which in 2007 enacted (and then rapidly backpeddaled on) an “abusive driver fee” that would increase the costs to in-state drivers for certain offenses but leave the cost for out-of-state drivers the same.