Thursday, September 24, 2015

The Debt Burden: Unsustainable State Deficits Outpacing Economic Growth

During the Great Recession, states across the country began running large budget deficits. This was to be expected. Tax receipts fell, while safety net expenditures (such as unemployment payments, food assistance and other help for those in need) increased.

While the Great Recession is defined as beginning in December 2007 and ending in June 2009, the state burdens never really went away.

Some governors cut their state’s taxes with the hope that it would increase economic activity, but unfortunately they were proven wrong.

More than six years after the alleged economic recovery began, numerous states are still running budget deficits, ranging from small states like Rhode Island to large states like Illinois.

Here are just a few examples:

• Illinois had a staggering $6 billion budget deficit in the 2014 fiscal year, and a $9 billion budget in the 2015 fiscal year — the largest state budget deficit in the nation.

• Pennsylvania dealt with a $2.3 billion budget deficit for 2015.

• Wisconsin faces a $2.2 billion budget deficit over the 2015 and 2016 fiscal years.

• Maryland grappled with a $750 million budget deficit in the last fiscal year.

• Kansas had a $710 million budget deficit for the 2014 fiscal year.

All but four states (Alabama, Michigan, New York and Texas) begin their fiscal year on July 1, meaning that they are now in fiscal 2016. Yet, the budget problems of recent years have continued unabated.

The New York Times reports the following state budget deficits for fiscal 2016, and this is only a partial list:

• Alaska is facing a deficit that could reach $4 billion in a budget of only about $5 billion — with years of deficits projected after that as well.

• Illinois is grappling with a $3 billion budget shortfall.

• Louisiana is struggling with a $1.6 billion shortfall.

• Alabama has a long-term $702 million shortfall.

• Kansas has a $400 million budget gap.

• Wisconsin has a budget shortfall of more than $280 million.

In short, the fiscal position of many states across the nation is awful, and the problem has been growing continually worse.

Just how bad is debt burden in all 50 states?

State and local governments have sharply increased borrowing over the past three decades. In 1980, they were carrying close to $400 billion in outstanding debt; by 2000, it was $1.2 trillion; and by 2013, it had reached $3 trillion, according to the Board of Governors of the Federal Reserve System.

Yet, according to another analysis, the cumulative state debt has grown much worse in recent years.

State governments faced a combined $5.1 trillion in debt, which amounted to $16,178 per capita in the nation, according to a January 2014 report by the nonprofit organization State Budget Solutions.

This means that state and local debt increased nearly 13-fold in just 33 years. Think about that for a moment; it amounts to a 1,300 percent debt increase in just over three decades. That’s astonishing!

While it’s true that state economies, revenues and budgets are also considerably larger today than in 1980, the massive increase in debt is still striking.

Given that reality, it’s not enough to simply look at the size of each state’s budget deficit; you have to consider the size of its economy, or gross domestic product (GDP), as well.

That's when the problem becomes more complicated: a whopping 47 states had deficits that were larger than their GDP growth in fiscal 2015.

In simple terms, if a state’s debt increases 2% but its economy also grows by 2%, it is effectively a wash.

But almost every state saw its debt increase well beyond its economic growth, which makes servicing those debts much more difficult.

So where is this all leading? Well, the outcomes will be very uncomfortable.

Whether it's public-employee pensions; the building, repair or maintenance of critical infrastructure; education; police; fire departments; or any of the other countless services that taxpayers have come to expect, something has to give.

The means simply do not exist to pay for all of it given the structural economic constraints.

In Here Comes The Next Crisis ’Nobody Saw Coming’, Charles Hugh Smith notes the following:

• Nominal GDP rose about 77% since 2000, while state and local debt rose 150% — double the rate of GDP. Again, debt has increased at double the rate of economic growth.

• State and local taxes have soared 75% since 2000, while earnings have risen just 38%, barely keeping pace with inflation. So, state and local taxes have risen at twice the rate of wages/salaries.

• State and local government expenditures have risen 82% since 2000 — faster than GDP, and twice the rate of inflation.

• Yet, wages and salaries are down 8.5% since 2000.

Taken as a whole, this is a recipe for disaster. All the problems from 2008 were simply papered over, not solved.

Debt is like the monster in every horror film; it’s hard to kill and keeps coming back.

This is a simple math problem, and the numbers do not add up. Debt has significantly outpaced economic growth, while taxes have significantly outpaced wages and salaries. Taxpayers are already squeezed and have little left to give.

As Herb Stein’s law states, “If something cannot go on forever, it will stop."

States cannot carry this much debt while their economies continue to struggle for growth.

This will not have a happy ending, and anyone paying attention knows this. The pending crisis won’t come out of nowhere.

It is already unfolding.

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