The Entrepreneurial View #476                                                               

The Economy and State Budgets

by Raymond J. Keating

When the economy hits the skids, state and local government budgets take a hit. Unfortunately, only part of the fiscal tale usually gets told during such challenging times.

Consider an article in the March 17 New York Times titled "As Economy Falters, So Do State Budgets." The piece noted that roughly half the states are wrestling with budget shortfalls. Among the states highlighted were California, Arizona, New York, Maryland, Kentucky, Florida, Delaware, Virginia and Maine. The main point of the article was that spending might have to be restrained, or even reduced.

Gosh, government actually restraining or cutting spending.

Don't necessarily count on it.  After all, the phrase "spending cut" is rather vague in political circles. The cries over a "spending cut" often only mean smaller spending increases than demanded by politicians and special interests.  It also was noted by the Times that various states are considering tax increases.

What was glaringly omitted from this news account was how states really got into their current messes. Of course, the immediate matters of the housing/mortgage meltdown, and either a severe economic slowdown or recession were highlighted. But what about the rate of government spending increases in recent times? Could it be that during the fat years, politicians were tossing around tax dollars in haphazard, wasteful ways?

Let's look at the recent trends in government spending in the states.  According to Census Bureau data, from 1996 to 2006 (latest data), per capita total state government spending increased by 60 percent. That compared to inflation (measured by changes in the GDP price deflator) running at 24 percent.

Expand the scope to state and local government, and per capita total spending jumped by 58 percent from 1995 to 2005 (latest data). And that compared to inflation of 23 percent.

To sum up, per capita government spending in the states over the most recent decade's worth of data ran at about two-and-a-half times the rate of inflation.

Hmmm.  So, do state and local governments across the nation actually face a revenue shortfall, or are taxpayers simply suffering the inevitable fallout from rapid and wasteful government spending?

And as states wrestle with their budgets in the coming days, weeks and months, if lawmakers decide not to get serious on spending, and instead raise taxes, that would only wreak further damage on consumers, entrepreneurs, small businesses, investors and the economy.

In the end, the economy is helped by fiscal responsibility, and that means spending every taxpayer dime wisely and cautiously, whether in good times or in bad times.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.