New Study on States in Peril

George Rebane

The venerable Pew Charitable Trusts’ Center on the States has just released a new report ‘Beyond California: States in Fiscal Peril’ (more summary material here and here.) 

The report documents what students of the American scene (that includes the astute RR readers) have known for some years now – legislating un/underfunded programs of social engineering will lead to financial ruin.  Well that ruin is upon us now, and the Pew folks list the other states following California pell mell down the fiscal (then social) rat hole.

The “report released today by the Pew Center on the States shows that some of the same pressures that have pushed California toward economic disaster are wreaking havoc in a number of other states, with potentially damaging consequences for the entire country.  Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin join California as the 10 most troubled states”.

The conclusions are not always that crisp, and some explain the situation using arguments from the ‘it hurts on account of the pain’ school of logic.  But those who still support the profligate policies that got us here (about which there is very little agreement) would do well to examine what the ‘here’ looks like across the country.  The quoted material below is from the Pew online sources.

The nation is watching closely as California struggles to avoid going broke.  So far, the most-populous state—and eighth biggest economy in the world—has unsuccessfully sought a $7 billion federal loan guarantee to pay its bills, temporarily issued IOUs to state employees and business contractors because it ran short of cash, and started shutting state offices several Fridays a month to close the largest state budget gap in the country. The same housing-market bust that triggered the national recession in December 2007 also set off the Golden State’s fiscal crisis. But a challenging mix of economic, money management and political factors has pushed California to the brink of insolvency.

California’s problems are in a league of their own. But the same pressures that drove it toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country.

Here is the mixed list the report identifies as contributing factors (causes?), some of which are clearly the effects or attributes of the resulting disasters.

(1) loss of state revenues; (2) the relative size of budget gaps; (3) increasing joblessness; (4) high foreclosure rates; (5) legal obstacles to balanced budgets—specifically, a supermajority requirement for tax increases or budget bills and (6) poor money-management practices.

Finally, some key trends that apply across all of our states heading for fiscal crisis -

• Unbalanced economies. A number of states on the list, including Florida, Michigan, Nevada and Oregon, have struggled in part because their economies have depended so heavily on a particular industry. This reliance on a sector may have paid off in times past, but it put these states at greater risk when the recession hit. States cannot choose their natural resources, of course, but they can budget and manage for additional volatility that can result from dependence on a particular sector. States increasingly are seeking to diversify their economies.
• Revenues and expenditures out of alignment. The severity of the recession has resulted in states across the country facing substantial gaps between what they collect in revenue and what they spend. But many of our 10 states, including California, Illinois, Michigan, New Jersey, Rhode Island and Wisconsin, have a history of persistent shortfalls. Aligning revenues and expenditures is a key component of fiscal health.
• Limited ability to act. In most of the 10 states, including Arizona, California, Florida, Nevada and Oregon, lawmakers' latitude to respond to the fiscal crisis by raising taxes or cutting spending is limited by their states' constitutions, ballot measures passed by voters, or other statutory or legal impediments to change.
• Putting off tough decisions. Several states on the list were unable to muster the political resolve to enact long-term fixes to their fiscal problems. Virtually every state had to make tough decisions this year about where to cut and how to raise additional revenues, including through taxes or fees. But in some states, including California, Illinois and New Jersey, lawmakers punted the responsibility–either by asking their voters or governors to make the call, or by borrowing or using accounting methods to put off the hard choices until later.

In ‘The Tarnished State’ the respected syndicated columnist Victor Davis Hanson focuses on California as the canary state, and provides a succinct summary of how not to do it, and concludes with some hope for the future.  A snapshot of the insanity –

Just three months after California raised taxes and cut services in an attempt to bridge a $24 billion budget shortfall, it is already broke. Once again it is begging and borrowing, issuing billions of dollars in bonds to raise cash — most of them rated barely above junk status. … But the more taxes rise, the more budget revenues fall short of outlays, despite recent spending cuts to stave off bankruptcy.

He concludes with –

As California hits bottom, there will be a growing realization, given its most unusual natural riches, that we don’t need to do everything right, just to stop doing everything wrong.

And that, dear reader, is also a prescription for our Republic.

Comments

[Steve Enos]

There was another real good story in the Bee yesterday about Calpers and that massive mess. The folks runing Calpers and what they have been up to is one of the big problems that needs to be addressed and reformed with oversight.

The list of other states in "trouble" like California shows Califorhnia is not alone. Nevada, Arizona and even good old Florida are in the same boat. Most of the states listed that are "least like" California have very low populations, thus less issues to address.

[Russ Steele]

California unemployment is 12.5%. The states reporting a record jobless rate were California at 12.5 percent, South Carolina at 12.1 percent, Florida at 11.2 percent and Delaware at 8.7 percent. The District of Columbia also set a high with an 11.9 percent rate.

Joblessness rose in 29 U.S. states last month compared with 22 in September, the Labor Department said today in Washington. Michigan had the highest jobless rate at 15.1 percent, followed by Nevada at 13 percent and Rhode Island at 12.9 percent.

The same states in trouble are unable to create the jobs need for a recovery.

[Dixon Cruickshank]

I noticed that most are construction oriented as well, depending in immigration - CA on the other hand has emmagration big difference-just say'in. If they could sell in CA then AZ and NV would be better, Fl needs the midwest and NE to be able to sell.

On another note - I guess the Libs don't like it when they are asked to pay extra ie: the berkley protests, I guess they want the state to pay for everything and still subsidize tuitions. Free ice cream cones for all

[Lea]

The causes have really resulted something large that damaged some localities. We have to do something about this.

[Wade]

I'm old enough to remember the Fox News - promoted recall of Gray Davis on the heels of the Enron / CA swindle. How, supposedly, the lack of drilling / power plant construction in CA had caused that crisis, the power shortages a vivid indictment of the consequences of liberalism, its regulations, its taxes. O'Reilly was particularly indignant, smugly excoriating Davis for the, at the time, $8 Billion deficit, prescribing tax cuts and ignoring the weird quandary posed by a system that requires a simple majority to spend money but a super majority to raise money. He was confident that a Republican would save the state from Democratic malfeasance and fiscal impropriety.

Hanson's article is unfortunately thin (though admittedly wide-ranging) on analysis and down right anorexic on policy prescriptions. His faith in the Randian concept that the rich - finite, irreplaceable, and achingly noble like Tolkien's elves - are being driven, reluctantly, poignantly, into the sea, never to grace the cruder races again, seems to be its main thesis. That gentleman raisin farmers are the wistful and tragic face of this diminished cohort is a supporting theme.

Though he stops short of calling for tax cuts and deregulation, the hints are there. He addresses water directly but leaves the subject far too quickly. Too bad. California, perhaps alone out of the Southwestern states, can make a decent case that dedicating 90% of its annual fresh water consumption to agriculture is a good idea AND a good investment. This case however needs more than a grandiose sense of entitlement and the proffered notion that modern resource extraction policy ought resemble its nineteenth century forebears, as gentry such as Hanson do.

Odd that an ongoing crisis wrought by financiers is laid at the door of teachers, janitors, engineers, etc. The massive compensation of the former is justly infamous but somehow it is the salaries of the latter that want the axe (especially when presented without context). Is the contention that these middle class public sector jobs ought not be middle class? And while we're talking about jobs, how exactly do all those illegal immigrants earn the money they remit to Mexico? Are they all prison guards? Who is paying them if not the gentleman raisin farmers / entrepreneurs whose state-subsidized and government-run water redistribution scheme stands threatened by the Marxists of Oakland and Sacramento?

Who but such a well respected military historian as Victor Davis Hanson could discuss at some length, in the very same article, agriculture without mentioning the massive subsidies in both wealth and resources given this industry, and illegal immigrants without mentioning their prominent role in the very same industry? That is some very particular scholarship indeed...

[George Rebane]

Wade - as you know, I have never been in favor of corporate or agricultural subsidies. However, I believe we subscribe to completely different analyses of illegal alien impact on the country. And public sector unions have a very bright future, at great cost to the Vallejos of our state and then to the states. Not to worry, you are on the winning side - but I don't think you will savor the victory.

I'd like to hear your take on my suggestion for starting non-profit public service corporations.

[Wade]

George -

I am well aware that one of our (very) few areas of common political ground is strict opposition to corporate and, perhaps especially, agricultural welfare. And I bring it up as such - common ground. In this case then, it's you and I against Hanson. The massive amounts of well-below market price water obtained, managed, and redistributed to Southwestern ag by governments state and federal is a huge, somewhat obscured subsidy. To hear Hanson or Hannity tell it, the "government" is somehow interfering in "private" enterprise when it alters the flow of its water redistribution system. I've heard hard-right ranchers in my part of the country refer to the federally subsidized (way below market price) grazing rights on federal lands with the same sense of entitlement and lack of irony.

As I hope you know, I am not at all anti-free market, but rather anti-"free market." That is, very much against the public resources/capital/risk >>> private profit system that all too often and all too successfully masquerades as pure capitalism in our country.

Having said that, I'm not so sure we disagree so heartily about the "impact" of illegal immigration. I do live a few hours drive from the border. My point regarding same is this: Illegal immigrants come here to work, right? Hence the remittances robbing California (and presumably other states) blind? Who's giving them all these jobs and paychecks? If we apply a notion that I know is popularly held on your blog, it is the independently wealthy, investor class that creates the jobs. Why is this investor class providing the primary fuel for an issue that they decry so bitterly in public?

When neo-liberalism succeeded in fully rescinding the Peace of Westphalia for capital, goods and labor began to allocate themselves accordingly. This is classical capitalism yet we persist in acting surprised and outraged, wagging our visible finger at the bricklayer whose movement is compelled by the invisible hand as surely as the load of bricks. If responsibility is sought, look to those who paid for the brick wall to be built in Fresno rather than those who failed to build one from San Diego to El Paso. The politics in this case are a red(bait) herring, follow the money instead.

It is of little use, I think, to rail about "beefing up" a border that is already post-nation-state. It's utility nows is as tariff for black market goods / labor.

A non-profit public service corporation? Nothing against it in principle. My own first-hand experience says that many of the cliches about government are true in the way that "The Office" is accurate about the private sector. This experience also suggests that lower salaries are *not* the answer, however, but competition of some form is. The usual formula for outsourcing for govt is the truly ridiculous (and offensive to capitalism) "cost-plus" type of scheme and I have seen plenty of that as well. Tell me more...

One last thought: Maybe California is blowing too much of its money on ruggedly libertarian, anti-government liberty colonies like Alaska and Wyoming? Better 101 gets fixed than another Bridge to Nowhere is built...

[George Rebane]

There is a lot of evidence, at least in California, that illegal aliens come here for many other reasons than to work in jobs rejected by Americans. California's justice system identifies 30,000 out of 80,000 LA area gang members are illegals. The story is the same in our prison system, and in spades in Nevada County where Mexican cartels operate huge sophisticated marijuana farms in these mountains.

You may be right that the border is already in a post-sovereignty state, but that doesn't mean (to me) that we still shouldn't attempt to remain a sovereign nation-state for as long as possible before the break-up.

For us to discuss what is the structure of an ideal 21st century society would require going back to first principles that derive from a social utility function. I'm not sure that ours will have enough of an intersection to constructively go forward to abstract such a structure. I think the exercise might be instructive though.

[Wade]

Of course it is not the various jobs themselves that Americans reject, it is the illegal immigrant wages, illegal immigrant benefits, and illegal immigrant occupational conditions that they reject.

I have read about the cartels and their public farming and it is not surprising that as Mexico is increasingly post-national that representatives of their emergent non-state entities are part of the illegal immigrant influx. I think though that these segments are rather small compared to the millions, no?

I do not disagree, we probably should attempt to preserve our institutions of national statehood as long as possible. The mainstream right wing however is very busy de-legitimizing those very institutions. Should Palin win in 2012, they will go right back to wearing flag pins and "trusting" the government, but these days with hollow states beginning to become reality, it might not be so easy to 180 as it was after Clinton. Back then, the right went from demonizing the state as black helicopter tyranny one day to identifying the state in the person of GW Bush, Louis XIV style. Hannity shifted seamlessly to equating criticism of the president to criticism of "America". Not so sure it will work as well next time.

Interesting that you speak of "ideal" 21st century society. I think many of the features of 21st century society will be far from ideal, and that those are the ones most interesting to discuss. Adaptivity will be paramount in making things more ideal.

One of the signature features of Westphalia and a defining characteristic of the nation state is the monopoly on violence. This seems to be one of the easiest things to recognize as it erodes. Mexico is a great example. In that context, getting ahead of the curve would be to drop national security as a "natural monopoly" or big government function, instead engaging the non-state sectors in a different manner. We have 600-700 Billion per annum to spend (or not) creatively.

[Wade]

This guy's pretty good for near-future transition stuff:

http://shloky.com/

[George Rebane]

Good points Wade. Recall though that I asked what your utility function was, the maximization of which would produce the ideal 21st century society.

Re shloky - I like his content in general; not sure I agree with the benefices he attributes to guild communities paying guild wages to support viable local economies. Seem this schema worked for the early adopters as long as they could count on the state to use its arms to enforce their rules. And then they fell apart.

[Wade]

Shloky is, I think, looking at loss of scale or a local economy that is necessarily local only (energy to expensive to ship things efficiently, including people, for instance). Not local economy in the current sense of "Support your local Radio Shack!" or whatever. How then, to work with those economic forces that would place pressure on individuals to avoid specialization (and thus the level of expertise that comes with it)? Guilds are an example of how this problem was approached at one point in time when similar conditions held. I see holes in it as well, but I don't think he means it as an "answer," just more of the "question." Could be wrong...

Not sure what you're asking for in terms of a social utility function. Income distribution? Vote rankings? Flat or convex indifference curves? Or are you just trying to lure me into your dark alley of expertise, blackjack me with some formula, and state that Pareto proved that rent-seeking should not be taxed, corporations should not be regulated, and that Howard Dean is Chou Enlai in drag?

[George Rebane]

Nothing as sinister as that (didn't know I had "dark alleys" of expertise). Reasonable dialogues should establish some common understandings early on so as not to talk past each other. By utility function I meant some collection of socio-economic measurables cobbled together so that one could rate/rank/design social orders. Anyone wishing to interpret your prescription would then understand what objective you were trying to achieve, and whether such a prescription would actually work according to your own standards (i.e. that it was a sane prescription). Such a utility doesn't even have to be deterministic, i.e. you could include probabilities and then seek to maximize, say, its expected value.

Were I to do the same thing, we could immediately compare them and see if there was even a point of continuing the conversation, since all utilities are subjective quantitative statements - e.g. c1*GDP + c2*GiniIndex. But most social utilities so expressed have some usable intersection of attributes that would allow the discussants to at least attempt to build something that would tend to max both utilities.