From 2002 to 2007, State Spending Rose 50 Percent Faster Than Inflation

Here’s part of my piece, co-written with Michael Flynn, on state budget deficts in the May issue of Reason magazine:

Consider the boom cycle preceding this latest recession. In the five years between 2002 and 2007, combined state general-fund revenue increased twice as fast as the rate of inflation, producing an excess $600 billion. If legislatures had chosen to be responsible, they could have maintained all current state services, increased spending to compensate for inflation and population growth, and still enacted a $500 billion tax cut.

Instead, lawmakers spent the windfall. From 2002 to 2007, overall spending rose 50 percent faster than inflation. Education spending increased almost 70 percent faster than inflation, even though the relative school-age population was falling. Medicaid and salaries for state workers rose almost twice as fast as inflation.

Recessions exert a great deal of pressure on state budgets. As economic activity declines, governments collect less tax revenue. As people lose their jobs or suffer drops in income, there is more demand for services such as job training, health care support, welfare, and unemployment compensation. The combination, it is often argued, throws state budgets out of balance and, because states are generally required to enact balanced budgets, often leads to tax increases, dramatic cuts in services, or both. These actions, it is argued, further dampen consumer demand and worsen the economic situation. The chief rationale for federal support of state budgets is to counter this cycle.

By studying the period from 2002 to 2007—that is, the period that began as the economy came out of the mild 2001 recession—we can judge how states spent money when times were better and their services weren’t as desperately needed. In this period, unemployment dipped to around 4 percent, a historic low in modern times; gross domestic product posted steady gains; and most economic measures pointed upward. Meanwhile, the states indulged in fiscal irresponsibility from which no taxpayer should feel eager to bail them out.

Full Column Here