Blame the states?
The main argument against state and local aid has been something of a they-made-your-bed take on the matter. "It’s a bad idea to bail out states from making the necessary decisions they need to make to increase and fix their structural deficit problems," Rep. Paul Ryan told me Thursday.
And it's true that state budgets aren't perfect, and in some cases are quite bad. The pension problem, in particular, is a bit scary. But is that what's going on now? Are states strapped because of terrible budgeting in the past few years? Well, no. Here's Ben Bernanke:
Many states deal with revenue fluctuations by building up reserve — or “rainy day” — funds during good economic times. Measured as a percent of general fund expenditures, the aggregate reserve fund balances for all state governments stood at a record of about 12 percent at the end of 2006; the states represented by the SLC had accumulated above-average reserves of around 16 percent. These high reserve-fund balances were helpful in lessening the severity of spending cuts or tax increases in many states. Nevertheless, given the depth of the recent recession, even these historically high reserve-fund balances proved insufficient to buffer fully the budgets of most states.
That's written in the language of boring, but here's the takeaway: States had record rainy-day reserves in the run-up to the crisis. That's pretty fiscally responsible. It's just that the crisis is the worst economic catastrophe since the Great Depression. You wouldn't want states budgeting for once-every-80-years economic storms. That'd mean keeping a lot of cash sitting around that could be more productively used for other things. And we don't want states deficit spending, or at least we seem to not want that.
But that means they need some help from the federal government -- which does have the tools to survive these storms -- when these crises do strike. We've started to walk away from that responsibility by using the long-run problems of state pension funds to decide that this is all their fault, but it really isn't. You can hardly blame Nevada and Florida for not managing global capital flows and Wall Street's risk-load. And the fact that pretty much all of the states fell apart at once -- save for a few that rely heavily on energy industries -- suggests this isn't a governance problem. It's a global economy problem.
Graph credit: Rockefeller Institute of Government