Corporate & Securities Law

The (deficit) spender of last resort

Todd posts below about the $26 billion bill before the US House today as a gift to teachers (or perhaps more accurately, teachers unions). In reality, only $10 billion of the funds is specifically slated to rehire laid off teachers and some other public employees. The other $16 billion is to fund another six months of increased Medicaid payments to the the States (according to this NYT article). In theory, States would use the freed up cash flow to retain more teachers, police and other public service employees. So it would appear the gift is more to the whole collection of public employee unions, not just the teachers. However, I want to focus on a different dimension of this bill: the use of the Federal government to circumvent State laws, rules and regulations regarding responsible fiscal spending.

According to the National Conference of State Legislatures, all but one state “have a legal requirement of a balanced budget” (see here).  State budgets have been hit by the downturn in the economy, just like everyone else’s. Most state legislatures have convened during that period and were able to choose for themselves whether to cut expenditures or to raise revenues in order to deal with their balanced budget requirements. In many (if not most) cases, the states chose to cut funding for the positions that would be refunded by the $26 billion bill in front of the House today. Legislators and executives in those states had to balance the needs of their states and the tolerance of their electorates in making those difficult decisions. These decisions were made much closer to the actual need–and the actual tax base–than anything done in Washington, D.C., and yet these were the choices made by our (more) local elected officials.

So now the Congressional Democrats and the Obama administration have decided (or are about to decide) to circumvent the balanced budget rules imposed on states by the citizens of those states and use the federal government’s seemingly unlimited ability to deficit spend in order to effectively allow the states to spend beyond their budgetary means. On paper, state budgets will appear balanced because the “revenue” from the federal funds will offset the increased expenditures they support.  But this simply shifts the state-level deficit to the federal level–where the voters have much less influence to restrain spend-thrift politicians and bureaucrats.

One can debate the merits of state-level balanced budget rules. However, the fact that the rules exist and that this federal pay-off to public service and teachers unions circumvents the spirit, if not the letter, of those rules should be taken into account. Then again, it seems there is little accounting–or accountability–for fiscal policy in the current political environment. It seems this Congress has expanded its role to include “the nation’s deficit spender of last resort.”

Full post as published by Truth on the Market on August 10, 2010 (boomark / email).