The original, long-since discarded, blueprint for the United States had the central government managing foreign affairs and protecting citizens’ Constitutional rights while the states designed and ran their own economies. The wisdom of this setup wasn’t always clear (segregation for instance) but lately the contrast between states that have to balance their budgets and are therefore forced to innovate and make hard choices, and a central government that can just run a printing press while continuing to expand, is making Jefferson and Madison look very smart.
The federal government, for instance, just passed a $150 billion jobs bill which it will pay for by borrowing and then printing new dollars to buy the resulting debt. No offsetting spending cuts, asset sales, or other adjustments to existing programs:
The U.S. Senate voted on Wednesday to approve a $150 billion bill that will extend some tax credits for businesses and individuals that had lapsed at the end of 2009.
The 62-36 vote will move the legislation to the House where representatives will either have to vote to accept the bill or work with the Senate to come to an agreement on the difference between the two versions of the legislation.
The Senate bill includes $70 billion for emergency benefits programs, including unemployment extensions and would provide $25 billion to state governments to aid tight budgetary conditions.
The move is being billed by Democrats in the Senate as another step in efforts to spur job growth in the recovering U.S. economy, where the unemployment rate rest at an unsettling 9.7 percent during an election year.
A $15 billion bill that was recently passed by the House, which focuses on tax breaks for businesses who hire new employees, will still need to be passed by the Senate before President Barack Obama can give it a final signature.
The bill passed by the Senate on Wednesday will give $25 billion to states to offset the rising costs of Medicaid and would avert a 21 percent increase in the payments made to doctors of Medicare patients.
For the financial sector, the bill would offer a tax break to U.S. banks for overseas income. It also includes incentives for business investment in recovering disaster areas of the U.S., like the Gulf Coast.
For the individual, the bill would offer state sales tax deductions and a reduction in the out-of-pocket expenses for classroom teachers in the U.S. Also included is language focused on helping pension plans that were devastated during the economic collapse and additional aid for the unemployed.
Now consider New York State, which is arguably even more corrupt and badly run than Washington. It would dearly love to keep spending at current levels and just borrow what it needs to keep the political class living in comfort. And it is considering borrowing. But look at what it has to go through to get there:
New York state may have to borrow to smooth a path back to financial health over the next few years, its lieutenant governor said yesterday, highlighting the severity of the fiscal trouble facing US states in the wake of the financial crisis and economic recession.
David Paterson, governor, last year tapped Richard Ravitch, whose work with New York city during its financial crisis in the 1970s cemented his credentials as a hard-nosed budget hawk, to draft a turnround plan for the state.
The plan outlined by Mr Ravitch comes amid political uncertainty for Mr Paterson, who recently announced he would not seek another term. However, Mr Ravtich’s reputation ensures that the initiative will be taken seriously by the state legislature, a notoriously fractious body.
Included in the plan are measures that lock the state into paying down a so-called structural deficit in five years, create a five-member oversight board to assess the budget situation quarterly and authorise the governor to make cuts if lawmakers fail to agree on gap-closing measures within a limited time.
Long-term planning would accompany future annual budget talks and the state would have to set aside more rainy day reserves.
“The current economic crisis did not cause New York’s budget troubles,” Mr Ravitch said. “It merely exposed them.”
New York has a chronic mismatch of revenue and spending that it had glossed over with the use of cash accounting, allowing for “one-shot” budget fixes, he said. Accounting practices vary by state.
The budget deficit is projected at more than $9bn (£6bn) for the fiscal year 2011, starting on April 1. But Mr Ravitch estimated the structural deficit was more like $13bn. He predicted that, without reform, the structural imbalance would surge in five years to $60bn, a gap that could only be closed with “horrendous taxes”.
His plan includes a shift to GAAP accounting, the accepted standard for US corporations, as well as a change in the start of the fiscal year to July 1 in line with most states.
The sombre budget news out of New York could be a sign of what is to come nationwide as lawmakers grapple with the latest round of budget deficits.
The ripple effects of the recession have decimated state tax revenues. That has meant several years of budget deficits and painful cuts to staff and services throughout the country. State lawmakers closed a cumulative budget gap of $145.9bn for the fiscal 2010.
As details of Mr Ravitch’s plan have leaked out concern has arisen over the inclusion of deficit borrowing, a practice that has always been controversial but has become a hot issue after Greece’s debt crisis.
Mr Ravitch argued it might be unrealistic to close bulging gaps with spending cuts alone. Under his plan, borrowing would come only with strict limits and controls on spending and revenue balance.
The proposed legislation would authorise up to $2bn annually in short-term borrowing secured by personal income taxes to balance the budget in the first three years of the plan.
A few thoughts:
- You can look at pretty much any badly-run state (Illinois, Nevada, California; the list is long) and find the same basic process at work: revenues are falling, public sector benefits are soaring, and hard choices are being contemplated. The end result — after many strikes and a few defaults — will be a more rational cost structure and states that can live within their more modest means.
- The federal government faces virtually no pressure to rein in its obligations. No one besides Ron Paul and Dennis Kucinich are calling for cuts in the world’s largest military empire. And the party in charge is actively increasing government’s role in health care and education, among many other things.
- The difference is that the Feds can simply print the money they need and the states can’t. Decades of not having to choose between guns and butter, of simply printing whatever was needed to fund whatever was crucial to national survival or moral obligation or electoral success, have produced a system that can’t even contemplate scaling back.
- The scam is nearing the end of its run. Based on this survey of the brick walls into which the U.S. printing press is about to slam, when it happens it’s likely to be sudden, and — given the cluelessness of the current debate — totally unexpected by the people now in charge. If you think New York’s situation is ugly, just wait.