D. Dowd Muska


D.C. and the States: Codependents in Overspending

December 20, 2012

The Great Recession was the worst downturn of our lifetimes. The “recovery” that followed remains tepid and tenuous.

Question: If states won’t reduce spending during an economic cataclysm, when will they?

Over the last few years, taxpayers have been subjected to a litany of sob stories from governors and state legislators. We’ve cut social services the bone! Tuition hikes at our universities and colleges are unfair! First responders are at risk! Class sizes are rising! We’re not making adequate infrastructure investments!

Terrifying. But new data from the U.S. Census Bureau show that Tallahassee, Topeka, Trenton, and their brethren haven’t let rough economic turbulence disengage the expenditure autopilot. In trillions, here is all-funds state spending between 2007 and 2011:

2007           $1.638

2008           $1.739

2009           $1.832

2010           $1.944

2011           $2.003

Nominal growth for the period was 22.3 percent. Adjusted for inflation, the hike was 12.7 percent. Austerity? Hardly.

Layoffs have been rarer than advertised, too. While the number of state employees dipped slightly in 2010 and 2011, it’s still above the pre-recession peak. Again using census data, here are states’ equivalent full-time employees, in millions:

2007           4.31

2008           4.36

2009           4.41

2010           4.38

2011           4.36

By function, health, hospitals, and “public assistance” swelled from $500.8 billion in 2007 to $622.5 billion in 2011 -- a real increase of 14.6 percent. Medicaid continues to be the welfare complex’s most ravenous line item. In a March report, the program’s actuarial office noted the horrific trend: “From 1971 to 2010, growth in Medicaid expenditures averaged 11.5 percent per year and enrollment growth averaged 3.4 percent per year.” Obamacare will worsen the entitlement’s staggering unsustainability, as additional beneficiaries join the more than 50 million Americans already on the dole.

Wasteful and underperforming government schools -- from pre-K to higher education -- badly need right-sizing, if not closure. The Great Recession presented an opportunity for sharp scrutiny of the revenue states shower on educrats. The best tools to foster private institutions and homeschooling deserved attention as well. Alas, meaningful education innovations weren’t considered. Instead, schools’ budgets expanded from $514.6 billion to $592.3 billion. After inflation, that’s a boost of 6.1 percent, despite declining enrollments at the primary and secondary levels and runaway borrowing bloat at colleges and universities.

States can’t print their own money, and rainy-day funds were quickly exhausted. It was a generous relative -- i.e., Uncle Sucker -- who helped out when tax hikes proved undesirable or ineffective. Not only was much of the president’s 2009 “stimulus” designed to bail out state governments, but another giveaway passed the following year. (Even The Washington Post denounced the second subsidy.)

Before the New Deal, very little of the revenue spent by state governments came from the feds. By 2007, the share had risen to 26 percent, and in 2011, it almost crested 30 percent. It’s a cash flow that must be stopped. As the Goldwater Institute argued in a 2008 policy study, “Today’s unfortunate arrangement of massive money transfers from the federal government to state government undermines the very promise of republicanism.”

Philosophy is important, but let’s do a number-crunching thought experiment. Pretend that in 2007, as the housing bust deepened and the economy began to tank, state “leaders” developed spines. Suppose they committed to a 15 percent spending reduction, and agreed to limit future budget growth to the Consumer Price Index until the economy made a complete recovery.

Imagine that our backbone-possessing pols found the cuts -- that they made employee compensation fully conform to the private sector’s wages and benefits, scrapped funding to “the arts,” eliminated economic-development boondoggles, and took advantage of long-neglected opportunities for competitive sourcing and privatization.

In this alternate reality, state expenditures in 2011 would not have been $2.003 trillion, but $1.454 trillion. In one year alone, that’s over $500 billion in tax hikes avoided and federal largesse (much of it put on the nation’s credit card) saved.

That’s not, of course, the way states operate. When revenue declines, every option is pursued in a desperate push to appease the unlimited-government lobby. Securitizing future income streams and shortchanging pension funds are standard tactics. Then come tax hikes, the severity of which depend on how deep a state’s blueness runs. But as long as Washington is willing, “free” money will be the favored “solution.” (Mandates and micromanagement are viewed as small prices to pay.)

The story of state budgets during the 21st century’s daunting downturn illustrates the boundaryless relationship between D.C. and the “laboratories of democracy.” For taxpayers’ sake, it’s time for a divorce.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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