2010 December 26 Sunday
NY Times On Deeply Indebted States

The editors of the Gray Lady take note of the perilous condition of Illinois state finances and the big debts of some other states.

For most of this year, the state of Illinois has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments. Faced with $4.5 billion in overdue payments, Illinois has proposed a precarious plan to sell its delinquent bills to Wall Street investors in exchange for cash, calculating that the interest it must pay the investors will be less than the late fees it owes.

Attempts to push the reckoning off have not succeeded. The future is here.

But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.

The Times editors predictably argue for higher state taxes and more federal aid to the states. But the states need to learn to get by on much less. High oil prices are on course to go higher still until they trigger the next recession. The states need to adjust now to a poorer future. Business As Usual is not in the cards.

You might wonder how could not just California, but Illinois and New Jersey get into far more dire straits than they acknowledge (the numbers at that link are incredible btw). To understand these failures of governance what's needed is an unromanticized view of democracy such as is found in Bryan Caplan's The Myth of the Rational Voter: Why Democracies Choose Bad Policies. I say blame the ignorant, uninterested, not sufficiently intelligent voters. Okay, now what?

We need bigger cuts in spending. But cuts and even tax increases probably won't be enough when Peak Oil causes the next recession. Debt holders and especially government retirees are going to have to take haircuts. I am firmly with those who argue that Euro states and American states need legal structures for bankruptcy so that they can go bankrupt with a minimum of resulting chaos.

Update: Here's a list of US cities running big budget deficits. Stay away from them. Some are cutting police staffing in a big way.

Update: Mish Shedlock is doing a great job blogging on the government debt disaster. For example, see his post Pensions Eat 70% of Decatur, Illinois' Budget; New York City's $76 Billion Shortfall; Houston Mayor Wants Pension Benefit Cuts. The Decatur, Illinois budget shows where other cities and states are headed.

Share |      By Randall Parker at 2010 December 26 11:36 AM  Economics Sovereign Crises


Comments
Interesting Connections said at December 26, 2010 12:10 PM:

It is intriguing that economists are aware that voters can be manipulated in their voting patterns but seem unwilling to admit that some actors are manipulating the economy as well.

Nick G said at December 28, 2010 11:06 AM:

Randall,

Illinois is in trouble, but not because of out of control spending. Their spending is in line with other states. And, of course, overall government spending is much lower in the US than in other OECD countries, especially if we exclude military spending.

The problem is under taxation. Illinois' income taxes are much lower than comparable states. Everyone knows they should be raised (even the local conservative media, such as the Chicago Tribune, and Crain's Chicago Business). Why can't they? Not because of the voters. No, voters are following the lead of the media, which is following a corporate line of "starve the beast" - trying to underfund government.

Can we blame voters for being manipulated by Fox news, et al? Sure. But that's blaming the victim. The perpetrator was the corporate strategists that 30 years ago started a long-term attack on government, starting with Reagan.

Nick said at December 28, 2010 11:12 AM:

These are the kinds of interests I'm thinking of. The overall campaign, as far as I can tell, started about 40 years ago. I saw an interview with William F. Buckley in which he discussed the planning process. Strikingly, both Buckley and the Kochs were heirs to oil fortunes...


"The billionaire brothers Charles and David Koch are waging a war against Obama. He and his brother are lifelong libertarians and have quietly given more than a hundred million dollars to right-wing causes."

http://www.newyorker.com/reporting/2010/08/30/100830fa_fact_mayer?currentPage=all

Nick said at December 28, 2010 1:36 PM:

I looked at Mish's comments on Decatur IL - one thing that might not be clear to someone not familiar with the oddnesses of gov budgets: the pension costs are funded out of the property tax levy, but the levy isn't the only source of funds for the city. So, it's not the case that pension costs are 70% of the city budget. They may only be a 1/4 of the city's budget (which would make the pension 18%, of course).

Randall Parker said at December 28, 2010 4:49 PM:

Nick G,

Some states have no state income tax at all. Period.

So why aren't Washington State, Florida, South Dakota, or about a half dozen other states bankrupt?

Oregon has a state income tax but no sales tax.

Randall Parker said at December 28, 2010 5:04 PM:

Nick,

Here is a list of income tax rates by state. Note that Pennsy is at 3.07% and Indiana is at 3.4%. Quite close to Illinois at 3%.

Illinois has fairly high combined state and local sales taxes. Though a few states are worse.

Nick said at December 29, 2010 2:48 PM:

Some states have no state income tax at all.

Yes, some states rely on other revenues. Florida has asset taxes that IL doesn't, for instance. Income taxes and sales taxes tend to be inversely correlated.

Illinois has fairly high combined state and local sales taxes.

Yes, but the base in IL is much narrower: other states tax many things that are not covered by the sales tax in IL: periodicals, services, etc.

Government revenues are complex - they're not susceptible to superficial analysis, which is most of what we get.You have to look at the overall tax burden, and the services provided by particular level of government. For instance, some states and counties funnel revenues to smaller units of government (e.g., school funding), others don't.

Randall Parker said at December 29, 2010 7:30 PM:

Nick,

Of course here in California we get high sales taxes, high income taxes, and a large government deficit.

Nick said at December 30, 2010 9:23 AM:

I have the impression that Californians have used the Initiative process over the years to mandate relatively high spending on several things, like schools (at least compared to other US states - it would be low compared to Europe). At the same time, Prop 13 limited property tax revenues, and other initiatives have limited other revenues (fees just got limited by a super-majority requirement, for instance). This all gives the Governator and Legislature relatively little discretion to fix the problem.

A recipe for insolvency.

You'd have to look at overall spending as a percentage of CA GDP, and then look at service levels and revenue sources. It would be very interesting to see a detailed analysis.

NotProgressive said at January 5, 2011 10:30 PM:

It's interesting that nobody ever mentions North Dakota. They are the only state in the union that has a State Bank. They do not use the Federal Reserve. The ND state bank overseas their private banks. The State bank returns most of its profits back to the State treasury, helping to defer taxes. During the banking crises, property owners in ND were unaffected. During the floods, the State just borrowed from their own bank, and then paid it back over the next year. The State's various departments keep their budgets in the state bank, instead of sending their money off to wall street. That means ND has money reserves on hand that can be used by the local economy.

One would think that a State bank would cause all kinds of shenanigans by the politicians. But, history shows public banking to stay in its box and not have the excesses of private banking. Maybe it is because the people are watching their state banks, and things are transparent. North Dakota should always be included in any comparison of States because their system stands out in stark contrast.


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