Reliance on fiscal gimmicks and stimulus funds have done no favors for state budgets. FY 2010 promises to be worse than last year. The National Governors Association reports states face budget deficits amounting to $134 billion over the next three years. Bob Williams writes only three governors appear to showing leadership on the issue: Indiana Governor Mitch Daniels, Virginia Governor Bob McDonnell, and New Jersey Governor Chris Christie. The reverse can be said for California. Governor Arnold Schwarzenegger has praised the stimulus for creating 150,00 new jobs in his state. As Veronique de Rugy points out, those are primarily taxpayer supported public sector jobs. For economic recovery to occur jobs must be created in the private sector. And there has been very little of that. California’s unemployment rate remains at 12.4 percent.
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.
How will state governments recover from the catastrophic collapse in revenues? According to Indiana Governor Mitch Daniels, that all depends on whether states want to face up to the caus — the happy (and now unsupportable) spending binge of the 1990s, when states increased spending an average of 6% a year.
Writing in today’s Wall Street Journal, Governor Daniels estimates it will take GDP growth twice the historical average of 3.49% to return state tax revenues to their previous long-run trend line by 2012.
And even then, revenue recovery may not happen. Consumer spending is down. Americans may have moved into a renewed era of saving. That means less sales tax revenues for states.
The choice before states: more taxes, or less spending, and permanently smaller government.
State governments will continue to face hard choices: slash services, union benefits, or privatize what the state cannot support.
The Journal also reports on what one-day employee furloughs look like in the states: A 3 hour wait for drivers license renewals in California, no birth certificates available in Wisconsin, the shutdown of shooting ranges and visitor centers in Michigan, no food stamp applications filed in Maine, and fewer traffic patrols on Maryland highways.
There is a bright spot in this exercise: furloughs force efficiencies. When California began DMV furloughs in January, 473,000 people chose to renew online, an increase of 32%.