Tag: state budgets

ObamaCare Is Undermining Economic Recovery, Job Growth

In a recent Wall Street Journal oped, Carnegie-Mellon economist Allan Meltzer explains how ObamaCare is delaying economic recovery:

Two overarching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future. High uncertainty is the enemy of investment and growth…

Mr. Obama has denied the cost burden on business from his health-care program, but business is aware that it is likely to be large. How large? That’s part of the uncertainty that employers face if they hire additional labor…

Then there is Medicaid, the medical program for those with lower incomes. In the past, states paid about half of the cost, and they are responsible for 20% of the additional cost imposed by the program’s expansion. But almost all the states must balance their budgets, and the new Medicaid spending mandated by ObamaCare comes at a time when states face large deficits and even larger unfunded liabilities for pensions. All this only adds to uncertainty about taxes and spending.

Meltzer concludes that the Obama administration is making the same mistake as FDR: “President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it’s harmful now.”

For more on the harm caused by government-created uncertainty, read my colleague Tad DeHaven’s recent posts.

Public Pensions as Property Rights

On Thursday I noted that former California House Speaker Willie Brown said we shouldn’t worry about the cost of government workers’ pensions because “My guess is that the State of California, like most places involved with pensions, is going to cease to pay them.”

My former colleague Andrew Biggs, writing at The American, says Speaker Brown and I are, believe it or not, too optimistic:

In most states, accrued public-sector pension benefits carry an effective property right, either through legal rulings or outright constitutional provisions. As Donald Kohn, the vice chairman of the Federal Reserve Board, put it, “For all intents and purposes, accrued benefits have turned out to be riskless obligations.”

Some states interpret these rights as prospective, meaning that not only does a public-sector employee have a right to the benefits he’s already earned, but he has a right to continue earning benefits at the same rate no matter how financially unsustainable the pension formula may be. These provisions make state pension benefits far more assured than even Social Security, which the federal government can legally cut at anytime.

Plus, he says, the pension shortfalls are even larger than most analysts think.

Resume worrying.

Utah Legislators Call for Fiscal Federalism

Tea partiers take note: at the forefront of any effort to reduce the size of the federal government should be the devolvement of federal programs to the states. Achieving this may seem like mission impossible given the states’ addiction to federal money. However, there are signs that the idea of returning the relationship between the federal government and the states to that which the Founders prescribed is starting to gain some currency.

On Friday, the president of the Utah Senate and the speaker of the Utah House of Representatives penned an op-ed in the Washington Post calling for the federal government to begin the devolution process. The authors want the states to have the right to opt out of federal programs and allow the states to keep the taxes their residents send to Washington to fund them. The states would then be free to fund and manage the programs as they see fit.

The authors call their idea a “modest experiment,” and indeed, it is hardly radical. The 10th amendment to the Constitution is clear:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

From the op-ed:

Let’s select a few programs – say, education, transportation and Medicaid – that are managed mostly by Utah’s government, but with significant federal dollars and a plethora of onerous federal interventions and regulations.

Let Utah take over these programs entirely. But let us keep in our state the portion of federal taxes Utah residents pay for these programs. The amount would not be difficult to determine. Rather than send this money through the federal bureaucracy, we would retain it and would take full responsibility for education, transportation and Medicaid – minus all federal oversight and regulation.

Such a notion terrifies proponents of big government because state budgets are generally constrained by balanced budget requirements, debt inhibitions, and the inability to print money. States are also more limited in how much they can abuse taxpayers for the simple reason that citizens can move to a friendlier environment. Indeed, one of the beautiful aspects of returning to fiscal federalism is that it would strengthen this competition that $600+ billion in annual federal subsidies has somewhat neutered.

See this essay for more on fiscal federalism and this Cato Policy Analysis on the problems with federal subsidies to state and local governments.

Update: A C@L reader pointed me to this resolution introduced by Michigan state representative Paul Opsommer, which calls on the federal government to allow the states to opt out of federal highway programs funded by the federal gas tax. The states would be free to fund their own roads with their own gas tax revenues instead of sending money to Washington where its then redistributed back to the states according to Congress’s politicized wishes. As the resolution notes, the federal government uses the leverage it has over transportation spending to force the states to enact policies that they don’t want.

State Budgets and Employee Compensation

Today, Cato released a report on employee compensation in state and local governments. As states struggle to balance their budgets in coming months, they should look to find savings in employee compensation, which represents half of all state and local spending.

The particular issue of excessive state pensions is being probed by newspapers across the nation. Over at Reason, Nick Gillespie discusses the problem in his home state of Ohio. That state’s newspapers teamed up to pen a series of articles on government pensions, which are representative of the growing pension problems in many states.

There has been a parallel series of articles across the nation on “pay-to-play” state pension scandals. These scandals involve Wall Street firms bribing public officials to get a slice of the government’s financial business. There is pay-to-play corruption in California and pay-to-play corruption in New York and many other places.

The solution to both of these problems is the same: moving the nation’s 20 million state and local workers from defined-benefit to defined-contribution pension plans. That way, governments wouldn’t have to hold giant pools of pension investments, the benefit structure of government workers would be more transparent, and policymakers could more easily cut compensation to balance state budgets.

States Are Always Surprised When the Bubble Bursts

Steve Chapman points out in the Chicago Tribune:

The crisis in state budgets is not an accident, and it wasn’t unforeseeable. For years, most states have spent like there’s no tomorrow, and now tomorrow is here. They bring to mind the lament of Mickey Mantle, who said, “If I knew I was going to live this long, I’d have taken better care of myself.”

If they had known the revenue flood wasn’t a permanent fact of life, governors and legislators might have prepared for drought. Instead, like overstretched homeowners, they took on obligations they could meet only in the best-case scenario – which is not what has come to pass.

Over the last decade, state budgets have expanded rapidly. We have had good times and bad times, including a recession in 2001, but according to the National Association of State Budget Officers, this will be the first year since 1983 that total state outlays have not increased.

The days of wine and roses have been affordable due to a cascade of tax revenue. In state after state, the government’s take has ballooned. Overall, the average person’s state tax burden has risen by 42 percent since 1999 – nearly 50 percent beyond what the state would have needed just to keep spending constant, with allowances for inflation.

Would that other journalists would show such good sense when governors and legislators moan about the draconian budget cuts they’re being forced to make, taking their state budgets back to the dark Dickensian days of 2003 or 2005.