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We Are Heading For A Fiscal Revolution

The federal debt ceiling has not ended America’s financial woes, but budget cutbacks will soon be coming to a state near you.  As Nicholas Johnson at the Center on Budget and Policy Priorities told the Washington Post:

‘The debt-limit deal inevitably will lead to large federal cuts in programs for state and local governments…This is going to begin in the middle of the worst year for state budgets.’


States had to close more than $100 billion in budget gaps [this year], mostly through spending reductions that often affected programs previously considered sacrosanct. That came on top of about $400 billion in budget shortfalls in the previous three fiscal years, caused by diminished revenue coupled with a surge in the demand for social service programs during the recession…34 states have cut K-12 education funding, 43 have reduced college funding, and 31 have slashed money for health care.

As revenues fall, fixed costs remain stunningly high. According this story in the WSJ. Detroit’s pension costs equal one fourth of its $1.2 billion general fund. The deep blue Democratic government of Detroit has negotiated tough pension cuts and will be coming back to local employees for more.  Mayor Dave Bing: “Detroit could no longer afford its pension system as it was structured.”

Neither can hundreds of cities and dozens of states.  More changes, more crises are coming as the big blue model moves ever deeper into decline.

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  • Tom Holsinger

    We are moving rapidly towards a 5-10% reduction in the total number of full-time state & local public employees from the July 1, 2011, baseline through the November 2012 election, and at least that much reduction in gross pay for those who who aren’t laid off. Nothing like this has happened since the Great Depression.

    One of my libertarian friends correctly said that public sector employment no longer has the cushioning effect it used to during recessions because increased government regulation has given public sector employment a negative effect on private sector employment.

    I.e., over-regulation has turned American governments into the equivalent of XUSSR industry, which was only effective at turning good raw materials into useless crap. The more American public employees there are, the less the American economy will grow until eventually the economy starts shrinking. We’ve reached that point.

    So the on-going reductions in public sector employment will lead in time to reduced government regulation, and a return to economic growth.

  • WigWag

    No Professor Mead, you keep getting this wrong; it’s not the blue state model that is in decline; it’s America that is in decline. Government workers are merely the latest in a long string of workers who have watched their standard of living collapse. Government workers now look like the Southern garment workers of 50 years ago or assembly line workers of 25 years ago.

    As you yourself have suggested, next in line are professional workers; people like the tenured faculty and administration employees at Bard or the accountants and middle managers at Fortune 500 companies who find their work outsourced to freelancers either here or abroad who cost far less. It won’t be long before the same thing happens to lawyers or even high tech workers; after all those computer programmers in Bangalore are just as smart as the computer programmers in Palo Alto.

    As state governments downsize, what do you think those laid off employees are going to do? They are going to start applying for the same jobs that people laid off from the private sector are already applying for; instead of every job opening having a hundred applicants, every job opening will have a 125 or 150 applicants. The effect this will have wages is obvious; with the demand for jobs far outstripping the supply, wages will fall, perhaps dramatically.

    It is unclear why you are so giddy at the prospect of Americans getting poorer. As government workers are laid off and as other sectors of the American economy implode in similar fashion, what effect do you think this will have on housing prices? People often forget that one of the major sources of capital for people who wish to start those new businesses you are always raving about is the equity in their homes. What happens to small business formation when people can no longer borrow against the equity in their homes because they no longer have any equity?

    You have made clear that you believe that the panacea for all of this is to be found in finding ways to do the same things at far lower cost and new fangled concepts like value added intermediation. But even you must know, in your heart of hearts, that these ideas are pipe dreams that will take decades to come to fruition in the unlikely event that they come to fruition at all.

    What we are far more likely to see, at least in the short and medium term, is something that is ubiquitous in impoverished third world nations; Ph.D.s serving as taxi drivers or working in fast food joints.

    You seem to agree that the United States is a force for good in the world and that we are, the “indispensible nation.” How exactly do you think the United States is going to maintain the strongest military on earth when employment is tanking and more and more Americans are watching their standard of living plummet?

    Fortunately, at the moment, energy and agricultural prices are up so states whose economies depend on those sectors are riding high; but is that what the American economy is coming to; an economy dependant on the vagaries of commodity prices? That’s the way third world economies operate; it’s never been the way the American economy operates.

    Gloat if you like, but if you are going to gloat, at least get it right; it’s not the blue states who are watching their economies collapse, it’s the United States that’s watching its economy collapse.

    As American power declines because of wrongheaded policies like the ones you recommend, who do you suspect will fill the breach?

  • Toni

    The Center on Budget and Policy Priorities is very blue. OF COURSE it forecasts dire consequences of budget cuts.

    A right-wing think tank report forecasting good consequences wouldn’t even rank as news, as defined by the mostly blue media.

  • Prologue

    I think Tom Holsinger may be onto something. Certainly food for thought. It will be interesting to see this play out over the long haul.

  • wws

    WigWag sounds like a [ad hominem attack deleted] who has to try to grab hold of Professor Mead’s coattails to try and get some attention.

    [inordinate] ealousy will do that to you.

    hmm, I wonder if you’re about to [unbecoming speculation about contributor’s career prospects deleted]? Don’t belittle the idea, at least it’s honest work.

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