Another Looming Crisis?

Here's a scare story from CBS's Sixty Minutes:



Sorry about all the commercials but that's CBS's way of squeezing you for profits.

This video trots out Meredith Whitney to validate the scare story. A meltdown. What? State and local governments are in deep debt. The world is going to end.

All this horror talk overlooks one simply way to balance the books: raise the taxes so that revenue matches expenditure. Instead, the whole story talks about austerity measures with deep cuts and even dark threats of defaulting on debts.

What? Why is the simple fact that governments have taxing authority. They can balance their books by raising taxes. Sure there is a limit. If they raise taxes to the point where people are left with too little to feed themselves. But Americans are among the lowest taxed populations on the face of the earth. So I only have crocodile tears for this "horror story" of state and local governments going bankrupt!

It is laughable that CBS presents Chris Christie, the New Jersey governor, as the voice of reason. This guy is a right wing ideologue. He is busy slashing costs and probably at the same time has a plan in his back pocket to roll out big tax cuts for the rich the minute he balances the budget. Funny how Christie can't spot an easy solution: raise taxes!

Sure, you want to stop waste and corruption, but the reality is that state and local governments are experiencing a temporary "drought" in tax revenues because of the Great Recession. So this "crisis" is a tempest in a teapot. It has a solution: raise taxes! The wealth of the top 0.1% of the population has doubled over the last 20 years. They are sitting on big bags of loot. Tax them!

The solution that CBS is pushing is "austerity" which means disrupt the lives of the millions in order to ensure that the dozens can sit atop their bags of gold, heaping them higher, secure in the knowledge that government is working for them, not for the poor slobs who actually have to work for a living.

Here's what Brad DeLong thinks of this ballyhooed "crisis".

Update 2010dec21: Here is a post by Nicholas Johnson at the Center on Budget and Policy Priorities where he serves as Director of the State Fiscal Project, which works to develop strategies for long-term structural reform of state budget and tax systems, encourage low-income tax relief, and improve the way states prioritize funding:

Last night’s CBS “60 Minutes” piece on state budgets made some important points but also — through some big mistakes and omissions — gave a deeply misleading impression of the state budget situation.

Here’s what it got right:

• As correspondent Steve Kroft put it, “The ‘great recession’ wrecked [states’] economies and shriveled their income.” State revenues are about 12 percent below pre-recession levels, after adjusting for inflation, yet the cost of basic services like education and health care — the two largest areas of state and local spending — is rising.


• The real pain from states’ current fiscal problems has been visited on the most vulnerable people, from low-income families needing medical care in Arizona to recipients of mental-health assistance in Illinois. That’s because states are required to balance their budgets — they cannot borrow to cover operating expenses. States have responded to the loss of revenues, in part, by cutting health care services and payments to nonprofits that serve the needy.


• Fiscal year 2012 (which will begin next July 1 in most states) will be the most challenging year yet for state budgets. States have largely drawn down their reserves, revenues are still depressed, and emergency aid from the federal government (hardly the “bailout” CBS suggested, but rather a way to keep more people working and protect a fragile economic recovery) is expiring.

Here’s what “60 Minutes” got wrong:

• Contrary to Kroft’s claim, states aren’t guilty of “reckless spending.” Total state and local spending, not including federal grants, is no larger now as a share of the economy than it was 20 years ago, according to U.S. Bureau of Economic Analysis data. (Federal grants to states have grown over this period to cover rising state Medicaid costs that result from health care inflation and a rising number of families without private health insurance.) State general fund spending in 2011 will be 6 percent lower than it was in 2008, without adjusting for inflation, according to data from the National Association of State Budget Officers.


• Underfunding of state and local pension funds did not cause states’ current fiscal problems and is not an immediate crisis. To be sure, some states have failed to make required pension contributions, including New Jersey (which in past years chose instead to cut taxes) and Illinois (which has a chronic revenue shortage due to political gridlock over modernizing its tax system). Nevertheless, the Center for Retirement Research at Boston College estimates that states and localities could restore pension systems to health by raising their contributions moderately once their revenues recover from the recession and/or by adjusting benefits, retirement ages, and similar policies. Many states are already starting to do both.

Most importantly, the “60 Minutes” story left the impression that states are so out of whack that there are no reasonable solutions to their financial problems. In reality, states have successfully closed several hundred billion dollars in budget gaps over the last three years through spending cuts and tax increases, a point the story overlooked.

Yet states need to do more. They can address their budget problems and lay the groundwork for future economic success by taking a balanced approach to the problem.

For example, states can establish formal procedures to determine the relative effectiveness of various budget expenditures in meeting specified goals and then cut spending that they judge has been least effective in reaching agreed-upon goals. States can also improve efficiencies in areas like corrections and economic development, modernize their tax codes (which in many cases are badly outdated), and collect new revenues to replace those lost to the recession. Prudent steps like these — not scare-talk about “the next financial meltdown” — are what states need to return to fiscal health.

Update 2010dec26: Here is a bit from an article on Bloomberg News by Joe Mysak pointing out that Meredith Whitney has the size of the upcoming default badly wrong:

There will be between 50 and 100 “significant” municipal bond defaults in 2011, totaling “hundreds of billions” of dollars.

So said banking analyst and new municipal bond expert Meredith Whitney on the “60 Minutes” show on Sunday, in perhaps the boldest, most overreaching call of her career.

Hundreds of billions of dollars? The one-year record, set in 2008, is $8.2 billion. You can see how an estimate of “hundreds of billions” would get people’s attention.

There are a lot of reasons to be doubtful about the health of the municipal market right now, as elucidated by “60 Minutes” correspondent Steve Kroft. Tax revenue is down, public pension and health-care liabilities are up, the federal government’s bailout money to the states is running out and the chances that those funds will be replenished are remote.

And yet -- hundreds of billions of dollars in default? The number is in the realm of the fabulous. If pressed, I would say that we might see between 100 and 200 municipal defaults next year, maybe totaling in the $5 billion or $10 billion range.