The States And The Federal Government On Spending

(MoneyWatch)  One of the old saws in U.S. politics is that the states are the incubators of ideas that then move to the national level after being adopted by the Federal Government. This has certainly been true in many policy ideas and practices. California is a perfect example with their stricter vehicle emission standards or rules on safety. Unfortunately as the various levels of government in America deal with the effects of the recession this idea is not applicable.

This is because the states unlike the national government require balanced budgets. Congress and the Executive Branch are free to spend whatever they want using Treasury Bonds to finance any deficit. Of course they have been doing this for fifty years or more and now the National Debt stands at 11 trillion dollars. Not only do most states not have deficits they also possess "Rainy Day Funds" allowing money to be set aside to cover times when revenues fall. Some states have these mandated by law.

This means that the states are currently making great efforts to reduce spending and come up with creative ways to raise money. Some have explored putting legal caps on how much spending can increase each year or based on some measure of economic activity. Others have tried to renegotiate or change the contracts they have with their state workers unions. California due to the fact it cannot easily raise taxes attempted to use constitutional amendments and ballot initiatives. That approach failed and now the state must make massive cuts in spending to balance their budget.

At some point the Federal Government will be in the same place. Either debt will not be able to increase because the Chinese and other borrowers won't be willing to buy bonds or the deficit will just grow so large that somebody will say "enough is enough". There have been attempts in the past to pass a balanced budget amendment to the Constitution but they have always failed for one- reason-or-another. The only real alternative will be large tax increases to try and raise the necessary revenue to meet spending plans.

Most states now recognize that cuts need to be made to the programs they fund and are doing so. This has led to broad based attempts to spread the reductions so that only one area is not significantly hit. As the state budgets take hits leading to spending cuts and layoffs this only exacerbates the problems of the recession and further reduces revenue. States and localities unlike the Federal Government also became dependent on the high real estate valuations that have now seen severe declines.

So where does this leave us? The American people are either facing a decline in what their governments buy for them or large tax increases. I think most politicians at all levels really would like to carry out revenue enhancements but lack the political will or are limited by law in adding them. There reasoning would be like in this article by a Nevada state university professor saying that tax increases during the current times were justified to keep a good higher education system. Oh yeah and thanks for letting him keep his job too.

Unless there is a major recovery in the U.S. economy, the world's really, then there will have to be some adjustment in the relationship between the people and the government. Either that or the borrowing will continue until it is unsustainable and some kind of change will occur to our system of financing government or the relationship between it and the citizenry.