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Thread: The Fallacy of "Balanced" State Budgets

  1. #1
    Super Moderator Zapp Brannigan's Avatar
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    Default The Fallacy of "Balanced" State Budgets

    The following is excerpted from a column by Gregg Easterbrook on espn.com:

    Because this is an election year, many states are campaigning for more federal money, and simultaneously boasting of how, unlike Washington, they nobly "balance" their budgets. Speaking recently on NPR, Governor Ted Strickland of Ohio, whose deficit will be about $1 billion this fiscal year, said his state urgently needed emergency aid from Washington. In the same interview Strickland complained about the federal deficit, declaring, "The federal government needs to become fiscally responsible." This points to a leading fallacy of American politics: the notion that states responsibly have balanced-budget requirements, while the federal government is the cause of all government deficits. Michael Dukakis in 1988, Bill Clinton in 1992 and George W. Bush in 2000 all boasted during their presidential runs that, as governors, they "balanced" their states' budgets. What nonsense! Most state budgets are "balanced" only in the sense that Washington gives large sums to state governments, shifting deficit spending upstream to the federal level.



    In fiscal 2007, the federal government handed out $232 billion in routine operating grants to state governments -- a figure that excludes federal payments for Medicaid, a federally imposed but state-administered entitlement, and excludes special federal hurricane aide to Mississippi and Louisiana. The fiscal 2007 federal deficit was $163 billion. That is to say, if the federal government had not rained money on state houses, Washington's books would have shown a surplus rather than a deficit in the latest fiscal year. So the "fiscally responsible" thing for Washington to do would be to stop giving money to the states! Ohio, for example, received $6.2 billion in other-than-Medicaid federal money in fiscal 2007, toward an other-than-Medicaid state budget of about $31 billion. This means about 20 percent of the Buckeye State budget was billed to the federal taxpayer, making it appear Washington was overspending while Columbus was being careful and cautious with money. The same applies to nearly every other state, where only federal gifts make state budgets appear "balanced."

    The situation is basically a bookkeeping swindle. Today federal taxes seem excessive, while state taxes seem affordable, because state taxes don't pay the full cost of state government, while federal taxes fund considerably more than the cost of federal government. The bookkeeping switcheroo makes the federal government appear less cost-effective than it actually is, while causing state governments to appear more prudent in their spending than they actually are. For instance, since the early Ronald Reagan presidency, state government employment has been rising while federal government employment has been declining; yet because states bill so much of their costs to Washington, people think the states are cautious about money while Washington is spendthrift. If states simply raised all their own revenue, federal taxes would decline, the federal deficit would vanish, and state taxes would skyrocket. Then voters would be mad at governors while objecting less to Washington.


    California projects a $16 billion deficit in fiscal 2009, much worse per capita than New York, with an expected $5 billion fiscal 2009 shortfall, or Arizona, at a projected $2 billion. Yet California has not taxed itself to cover the problem, expecting instead a federal bailout. When times were flush and tax revenues high from 2003 to 2006, California, New York, Arizona and other states now short of money did not save for a rainy day: They spent freely, and now demand that someone else cover the bill. So far, only Maryland has done the manly thing: raising state taxes to pay off its deficit on its own.
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  2. #2
    NCAA Champ ccbig's Avatar
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    Default Re: The Fallacy of "Balanced" State Budgets

    I disagree because the money given to states are at least spent inside the USA.

    The cost of the Iraq war is well over 513 billion dollars so far.

    link- http://www.nationalpriorities.org/costofwar_home

    The cost of the war in Iraq for 2007 alone was about $5,000 dollars per Iraqi citizen. More then triple Iraq's per person GDP!

    link- http://zfacts.com/p/447.html
    If we don't fight hard enough for the things we stand for, at some point we have to recognize that we don't really stand for them.

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  3. #3

    Default Re: The Fallacy of "Balanced" State Budgets

    How does it matter where the money is spent -- when its gone, its gone. States may not have the resources that the federal governmetn has, but deficits aren't an economic problem if the money spent encourages productivity, like safety (can't work if you're dead), business operation, sales, etc. If the deficit goes into welfare or arts programs that do not induce economic productivity, the economy will have a harder time making up the difference.

    Where a lot of people run into a misunderstanding is they think that deficits are always bad, but they don't want to cut social programs. They don't understand that government's only source of income is taxed productivity, which is paradoxic, since taxes inherently reduce productivity, by adding additional cost that deters sales and does not, itself, lend to innovation or increased productivity. The challenge for the tax portions of fiscal policy is to find a tax rate that is low enough to encourage productivity, yet high enough to cover necessary operating expenditures for the government. The challenge for the spending portion of fiscal poilcy is to spend enough to cover necessary operating expenditures, but not create a drain on productivity.

    It makes no sense to tax corporations and wealthy people at higher rates, because they're the ones who employ everyone else. The harder you make it for them to do business, the less money we all make.

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