The Downward Spiral of the States

According to a recent survey, individual American states are about to see worsening economic conditions even as the nation, potentially, emerges out of recession. The problems on the state level mirror those of the federal government save one important difference - the Feds can print money.

Over the last half century, state budgets have expanded as more and more services were provided without the necessary taxes to pay for them. While the federal government has a relatively easy time running a deficit, the states are forced to use much more draconian measures to balance their budgets. Many states are about to (or have been) lay off huge numbers of employees and begin cutting social programs while they may also need to begin raising taxes to cover their costs and service their debts.

The problems for the states may be multi-fold. First, as employees are laid off tax revenues are going to decline as will the demands on the unemployment and pension systems. But, as there are fewer employees, state governments will become less and less responsive. Secondly, as interest rates begin their inevitable move upwards, the cost for states to borrow money will become higher forcing the states to cut even more programs.

Unfortunately, there probably are no painless solutions for the individual states right now. A major part of the 2009 Federal government's stimulus package was transfer payments to the states to help hold up their budgets during the recession. As NJ Governor Chris Christie explained, these payments may have only delayed the inevitable pain which the states are going to feel unless the federal government continues them indefinitely. Such a move is highly unlikely and will be politically impossible.

The states are going to have to accept some pain now and then learn from their mistakes in the future. Plans must be made during prosperous years for the lean years. States also must limit the amount they allow themselves to expand when things are good so they do not need to make such deep and painful cuts when things are bad.