Three headlines in the news last month suggest just how serious the problems confronting many state and local governments might be in the near term.
The first – “Unions Fight Scranton Mayor After He Cuts Pay to Minimum Wage” – has been largely ignored as a singular problem faced by a relatively small city/town. But the details of the story behind the headline may have broader implications.
The story behind the headline is that Scranton, Pennsylvania, was down to $5,000 in cash and was unable to secure any loans to make payroll and pay its bills. As a result, the mayor unilaterally cut the pay for all city employees, including himself, to the minimum wage, $7.25 an hour. According to the New York Times’ report, the city’s problems are the result of long-term structural decline (meaning the city’s tax base has disappeared), a mayor and city council at loggerheads, and a lack of credit with lending institutions.
The second – “Third City in California Votes to Seek Bankruptcy” – tells of the $45 million shortfall the city of San Bernardino is facing as its city council debates whether to seek reorganization under the bankruptcy laws. The filing would be complicated by a California law that requires cities to first go through mediation with employee unions and creditors before seeking bankruptcy protection, but with an unemployment rate in the city of 15 percent, tax revenues have been inadequate to meet the city’s expenses.
The third headline – “States Face Tough Choices Even as Downturn Ends” – involves the debate over the proper balance between taxing and spending as states struggle to keep funding available for basic services while also maintaining enough private enterprise development to keep a functional tax base and decent employment levels.
Across the country state legislatures and governors are struggling with the need to attract businesses and thereby improve employment prospects on the one hand and the necessity to provide basic services like public school funding and public safety on the other.
Two states epitomize the debate. In Maryland, which is controlled by the Democrats, the legislature voted to raise income taxes on top earners this year to maintain funding for public education. The state has a top credit rating, but the tax increase has led some business groups to warn that the higher taxes might make the state less competitive.
In Kansas, which is controlled by Republicans, the governor (Sam Brownback) has supported tax cuts for individuals and small businesses despite the effect that the resulting lower revenues will have on state programs and projects.
The kinds of programs, in addition to public school funding, that are most often at risk when expenses need to be cut are those that would provide aid to the poor and disabled. But the conservative view is that without a strong economy, spending on those programs is unsustainable anyway, while with a strong economy they can be funded responsibly.
Of course, the battle between the two philosophies is also playing out in the presidential campaign, as Mitt Romney sounds almost defiant in claiming that he opposes adding police and fire fighters to the detriment of balanced budgets, while Barack Obama rarely speaks about the spending required to fund the programs to support the poor and to stimulate the economy that he supports.
There is one major difference, however, in the problems faced by local governments and the federal government. At the state and local level, budgets must ultimately be balanced. Cities like Scranton and San Bernardino can only borrow so much from lending institutions before they are cut off, as has happened in those cities. States can only go so far in debt before they are unable to sustain that debt with more debt.
The federal government, on the other hand, has no such limitations. Debt ceilings for the federal government are just a number, so long as Congress is willing to increase the allowable level of that ceiling, as it has consistently ever since the debt limitation law was first enacted in 1939. In the last ten years alone, Congress has voted to raise the debt limit eleven times.
And the federal debt has been a campaign issue in every presidential campaign since the end of World War II. Then, the debate was over a debt that registered in the hundreds of millions of dollars. With the growth of the economy (and the commensurate growth of the federal government) the debt grew into the billions. During the years of the Reagan presidency, it grew to over a trillion dollars. And in the last decade, under both Republican and, now, Democratic administrations, it has grown to the teens (in trillions of dollars).
Republicans like to emphasize the size of the federal debt by talking about how high a stack of one dollar bills would be to equal it. (Answer: to the moon and back, although I’m not sure how that measurement can be verified.) Fifteen trillion (15,000,000,000,000) is an imposing number. If you were to start counting to it when you first learned how to count, you might not get there by the time you died.
But immense proportions notwithstanding, the fact is that the federal government is nowhere near the limit of its ability to support its indebtedness. In fact, the cost to the government of the borrowing it is currently doing is amazingly cheap (thirty-year federal treasury bonds are currently issued at a meager 3 percent interest), despite constant fear mongering from deficit hawks who have been claiming forever that high levels of federal indebtedness will spike inflation and, ultimately, bankrupt the country.
In fact, nothing could be farther from the truth, which is why comparisons to Scranton and San Bernardino (or, for that matter, Greece and Spain) are entirely unjustified.
The United States is the economic engine of the 50 states and of the entire world. It needs to start acting like it by spending more to stimulate economic growth and employment and by providing greater financial assistance to states and localities.
Stimulation by the federal government is the only way to get the country healthy again. Austerity at the federal level only exacerbates the problem.