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Nov 11 2009, 4:14 pm by Derek Thompson
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I keep seeing this phrasing, and it's stupid, because it implies that states are like people with really bad credit who can't borrow money, and therefore have to run everything on a cash basis. States can run deficits just like companies and individuals can run deficents: if at the end of the budget period you owe more than you did at the beginning, you had a budget deficit. Furthermore, many states including Illinois (my own state of residence) have assumed massive obligations to make payments in the future and have not adequately funded them with present value, which could also reasonably be referred to as "running a deficit" even though the future obligations are not accurately quantifiable.
The real difference between a national sovereign and anybody else is that a national sovereign can print money and therefore could theoretically get *out* of debt, or close a deficit, at any time at effectively zero cost to itself. And on paper, the US can't even do that at this point, because the US does not issue its own currency (other than coinage.) It's quite possible that the Federal Reserve - which is not part of the USG and does not answer to it - could, at any time, refuse to buy more US debt and/or "print more money," which could result in the USG being unable to meet its obligations in the ordinary course.
Of course what would really happen if they were stupid enough to do that directly would be that Congress would revoke the Federal Reserve Act and the USG would resume its direct money-creation authority. But technically, that is the state of affairs.
What about NY State?
"it implies that states are like people with really bad credit who can't borrow money"
And some are just like that. Worse even, because you can't break their knee caps. But some states have to pay higher interest on their bonds to raise the money. Right now, I wouldn't invest in a CA bond no matter what rate of return it was supposed to bring.
And the Bureau of Engraving, a department under the US Treasury, prints paper money. The US Mint, also a department of the US Treasury, makes coins.
Having to pay really high interest rates is not the same thing as not being able to borrow money (although you're right that eventually it has the same practical effect.) And, as I said, part of the "deficit" is not contractually quantifiable debt, but rather entitlement obligations. That part would be a lot easier for a state to get out of, though.
The Bureau of Engraving and Printing prints the money *for* the Federal Reserve. It does it at the Federal Reserve's direction: essentially, it has a legal monopoly on producing a product which no one but the Federal Reserve (not the USG) is allowed to buy. No one in the USG has the authority to order the BoEP to print money and deliver it to anyone but a Federal Reserve Bank, and if they did, it would not be lawful under the Federal Reserve Act.
This does raise the interesting idea that the Mint could be directed to produce, say, thousand-dollar coins on rounds made of some inexpensive base metal. However, absent a LOT of thousand-dollar coins, the US couldn't realistically "print" enough money to pay off all its debts and close the deficit without the complicity of the Federal Reserve, which is not required under current law to cooperate with any such attempt.
If the U.S. were to deliberately inflate to reduce its debts, interest rates would spike up. Most of our debt is short term and has to be rolled over.
The bottom line is that the markets can pull a trillion dollars out of the U.S. faster than we can "print" it. Deliberate hyperinflation would be suicide.
Somehow or other, we are going to have to live within our means sooner or later.
States can run deficits just like companies and individuals can run deficents
That's not true. Most all states have constitutional requirements to have balanced budgets. Perhaps you mean that states can borrow money to overcome short term shortfalls, but if your note is meant to clarify language all around on this issue you'd need to be more clear yourself in spelling it out.
The truth is that most states are having a hard time because their revenue streams are not coming in even close to projections. And, like individuals who might have a hard time projecting their income for the next year and need to get a new credit card to pay for stuff now, the cost of borrowed money will be extremely high. Yeah--it is an option, but just about the last option a state wants to take. With declining revenues this will mean millions of extra dollars to cover the higher rates needed to be offered in order to sell the bonds.
California isn't a disaster (yet). We still haven't cut the budget or increased taxes enough to close the hole. The water measure just passed requires billions more in borrowing, so you can't even say that the state government is taking its problem seriously.
A disaster will be when services start to shut down for lack of cash. I expect that will happen in California and other states.
I also can't see how the national economy as a whole recovers without California and the other states listed. Even if there's no outright defaults, there's not going to be much growth either.
I still don't buy their justification for giving equal weight to states that require a supermajority for their budget or to raise taxes.
They end up claiming that states with larger fiscal gaps, worse records on money, and larger falls in revenue are worse off just because they don't have a supermajority requirement. It's yet another bias in favor of raising taxes.
It's as ridiculous as the continual claim that "cutting spending is politically impossible, so we must raise taxes." That claim ignores that raising taxes has proven just as politically impossible. Some states, after all, have cut spending because of the crisis.
If they insist on including that biasing metric, they should include a metric that is no less valid but biases the other way-- rating a state worse the higher the tax rate already is. After all, a state with a low taxes now have more room to raise them-- economically, as there's more room before deadweight loss becomes worse, economically, because if the taxes are lower than neighboring states, they worry less about chasing jobs away by raising them, and politically because of what people will bear.
Certainly one thing that plays into California's problems is that it's already a highly-taxed state, and California's high taxes have already been chasing net domestic migration to neighboring states. That restricts California in real ways from raising taxes more.
Illinois has an absolutely massive budget gap, but because having a super-majority requirement is worth a massive five points out of thirty alone, it looks "better" than states that are clearly in objectively better shape.
Arkansas gets a score of 14 on the metric, despite objectively being one of the best off states, simply because, while in great financial shape, a super-majority is required.
The scale is also fixed so that California is automatically at the worst possible score of 30, even though some states are worse than California on individual metrics.
The fiscal gaps are also highly misleading, as they're all based on FY 2010 as of July 2009. But some states have a two-year budget cycle, whereas other states adopt one-year budgets. Some of the states with one-year budgets have smaller current fiscal gaps because they've adopted a new budget in the past year (which is already in deficit), whereas some of the two-year budget cycle states haven't adopted a new budget in longer.
Horrible, shoddy invented metric by Pew here, designed to grab headlines but obscure information.
None of the states are allowed to run a deficit, so all a super-majority requirement does is make spending cuts more likely, or shift the center of power. However, it has very little to do with the size of the fiscal impact on a state and what the magnitude of the gap is, and whether a state could afford to do one or the other. It's not worth six points out of thirty, especially when not balanced by a metric judging how high the existing tax rate is, and thus how much room to raise taxes there is.
The second chart shows that state tax revenues have climbed nearly every year. Indeed, there were 10% jumps just five years ago. Whether or not states can run a deficit, it seems they're definitely not capable of putting money aside for hard times.
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