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Steady Decline Through 2060?

Posted by Larry Doyle on June 28, 2010 1:12 PM |

What type of legacy are we leaving our kids? Will we leave them so burdened with overwhelming debts and deficits so as to strangle and choke off real opportunities? While Uncle Sam is able to play charades in an ever increasing and dramatic fashion, Sam’s smaller brethren at the state and local levels do not have those capabilities.

On that note, let’s look westward. I wrote in May 2009, “As California’s Economy Goes, So Goes the Country.” Along the same line, today we read from BloombergStates of Crisis for 46 Governments Facing Greek-Style Deficits:

Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end.

Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue.

Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone.

Even as the U.S. appears to be on the mend — gross domestic product has climbed three straight quarters — finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.

“States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

But clearly this crisis will pass and economic health will return later this year or worst case early 2011, correct? Do not be so sure. The debt burdens within municipal finances (pensions and healthcare especially) are enormous. How long might it take to properly address and rectify this situation? Bloomberg continues:

Lawmakers need to overhaul tax policy, underfunded public pensions and entitlement spending programs such as Medicaid if they want to establish long-term plans that will foster growth, says former New Jersey Governor Christine Todd Whitman.

If they fail to act, state fiscal positions will steadily erode and hurt the U.S. economy through 2060, according to a March 2010 report prepared for Congress by the U.S. Government Accountability Office.

What? Did I read that right? 2060? Let’s go to the source. Sure enough, the U.S. Government Accountability Office released a State and Local Governments’ Fiscal Outlook: March 2010 Update:

The state and local government sector continues to face near- and long-term fiscal challenges which grow over time. Although the sector’s near-term operating balance remains negative, increases in federal grants-in-aid–largely from the Recovery Act–alleviated some near-term pressure. The March 2010 operating balance measure (including 2009 Recovery Act funds) shows an improvement compared to the January 2009 simulation. In the near-term, the sector’s fiscal position can be attributed to several factors, including steep revenue declines. GAO projects that the sector’s long-term fiscal position will steadily decline through 2060 absent any policy changes.

I did read it right.

Do our political leaders have the will and determination to make the necessary policy changes? What are the costs and impacts of those policy changes? Will we witness social strife here in America similar to that seen in select European countries as the belt tightening begins?

We got ourselves into this mess. Can we get ourselves out?


Some legacy!!


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