Out of Control Policy Blog

Following California Down the Path to Fiscal Ruin

The NGA-NASBO reports issued yesterday—which predict a fiscal "lost decade" for states—weren't the only source of bad news for state policymakers. The Pew Center on the States also released a new report—Beyond California: States in Fiscal Peril—profiling the fiscal disasters in the worst-hit state, California, and nine others (Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin) that aren't far behind in the severity of their crises. The report is well worth a read for some insights into what's driving these fiscal trainwrecks. 

As this Arizona Republic piece by Mary Joe Pitzl notes, these states share some common problems—overreliance on specific economic sectors, voter-approved spending mandates, and general lack of political will to create economically-sustainable fiscal policy, to name a few. But at a practical level the biggest problem, of course, is the mismatch between revenues and expenditures. Arizona's is pretty simple and stark:

...Currently, Arizona's budget calls for $10 billion in spending, but there is only $6.4 billion in projected revenue.

As I wrote yesterday, an imbalance of this scale is not something policymakers can simply tax, borrow and gimmick their way out of, in good economic times or bad.

There's no appetite for the level of tax increases, fee hikes and borrowing that it would take to sustain pre-recession spending levels. And those strategies are akin to shooting oneself in the foot, as they'd prolong and compound the recovery and kick the can down the road. Further, NGA and NASBO (among others) projecting tough economic times for states for the next decade so we're going to have to settle in for a long, difficult ride. Given all of these stark realities, there's no way for policymakers to avoid cutting the size and scope of government.

Leonard Gilroy is Director of Government Reform

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Comments to "Following California Down the Path to Fiscal Ruin":

Paul Isley | November 15, 2009, 6:22pm | #

I am currently in Xiamen, China after overseeing the printing of a coffee table book in Yang Jian. China is the antithesis of our country in general and California in particular (my State).

Because of the economic slow down, China's exports have decreased. Therefore the government has picked up the slack by investing some of its huge capital surplus into road construction, bridge building and other infrastructure projects. The pace of construction here boggles the mind. And it has been happening for years.

I don't begrudge China for what the people are accomplishing, they deserve it. I feel sad for the U.S. and the States mentioned in the article but, in the final analysis, the people are getting what they voted for. There's no magic to any of it and there's no free ride. The people will receive the consequences for their lack of political, economic, and historical knowledge. Finally, the fact that the U.S. has over half the lawyers in the world speaks to another subject that is rarely addressed and for which our economy pays a heavy price. And one of our political parties is beholden to the trial lawyers, the spear tip for the industry.

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