One thing that I watch closely is the health of the finances of the states. Because they don’t have a printing press, and most of them have to balance their budgets, they are a better read on the health of the economy than national statistics.
As it is, states are cutting their budgets drastically because their tax collection is down dramatically. California is a leading example here. Will it refuse to pay, and what of its municipalities? How many will file for Chapter 9, like Vallejo? My guess is that many municipalities will file Chapter 9, but that California will avoid nonpayment.
There is one more issue worth pursuing here. Though states have to run balanced budgets (largely on a cash basis), that says nothing about pensions and other long-dated promises. I find it fascinating that some states are still trying the gambit of pushing retiree expenses out into the future. To me, that is a sign of desperation slightly smaller than making significant budget cuts. It’s just playing for time at a time where delay has few advantages.
That’s one reason among many that I do not see “green shoots” at present. During a period of debt deflation, many troubles fight prosperity as the financing bubble deflates. If the states aren’t prospering the nation is not either, regardless of what statistics the national government might dream up.
Hi David,
Deferring the problem might have few economic advantages, but it certainly has political advantages to stick one’s political successors with the problem in order to ensure one’s election now. Other than a tremendous and unlikely effort to educate the electorate, I don’t know how you overcome that issue.
Steve
I think California should be a wake up call to everyone, especially those who favor a larger government.
David neglected to mention there is a HUGE advantage to delaying pension payments. As the first commenter noted — the advantage is political, not economic.
Lots of ink has been spilled about the “incentives problem” in financial companies — investment bankers getting paid to take outsized risks because they get a nice piece of any upside, but essentially no downside.
Government bureaucrats also have major incentives problems. They benefit from oversized budgets. A few of the perks available to members of Congress have made the news, but most of the public is still unaware of just how many things are paid for by lobbyists seeking to gain access. Essentially, Congress’s paycheck is 100% revenue — they have no expenses since everything is paid for by lobbyists or taxpayers (or both)
One might ask why anyone would spend tens of millions to get a job that pays $180K for 6 years (in the House). The answer is the perks far exceed the stated paycheck.
In the 1800s, a bank robber named Willie Sutton was asked, “how come you rob banks?”. Sutton is reported to have replied, “because that is where the money is!”
Why do crooks — sorry politicians– run for office? Because that is where the money is. The biggest industry in our “free market economy” is government. Local, State and Federal government was 31% of GDP as of 2008 (before Obama’s massive expansion). Back in the days of JFK, it was 16% of GDP. Government has grown twice as fast as the economy as a whole.
The bigger government gets, the more opportunity for corruption.
California’s bureaucrats — elected and not elected– now run the state for their own benefit. Anyone who has walked into a DMV knows the headcount is off the charts. Government employee productivity is a oxymoron. Adjusted for productivity (or lack thereof), government employees make far more than anyone in the private sector including CEOs.
The U.S. taxpayer is going to have to start looking out for him/her self, because these bureaucrats no longer even pretend to represent us.
Good point, Greg. I have mentioned the political advantage before, but not here. The point bears repeating.
I agree that the state tax revenue statistics are very revealing about what’s really going on. I wrote about this last month:
http://www.topgunfp.com/state-tax-receipts-plummetting/
The New York Times had a good front page article on the state budgets today:
http://www.nytimes.com/2009/06/22/us/22states.html?ref=todayspaper