Statist pigeons come home to roost

Time magazine's cover story for its issue of June 28, 2010, is headlined "The Broken States Of America". It's a very long article, which I highly recommend reading in full - in fact, it's too important not to read in full. Here are some (but not all) of the highlights.

From Hartford to Honolulu, once sturdy state governments are approaching the brink of fiscal calamity, as the crash of 2008 and its persistent aftermath have led to the reckoning of 2010. Squeezed by the end of federal stimulus money on one hand and desperate local governments on the other, states are facing the third straight year of staggering budget deficits, and the necessary cuts will cost jobs, limit services and touch the lives of millions of Americans. Government workers have been laid off in half the states plus Puerto Rico. Twenty-two states have instituted unpaid furloughs. At least 28 states have ordered across-the-board budget cuts, with many of them adding deeper cuts in targeted agencies. And massive shortfalls in public pension plans loom as well.

Almost no one — and no place — is exempt. Nearly everywhere, tax revenue plummeted as property values tanked, incomes dwindled and consumers stopped shopping. Falling prices for stocks and real estate have made mincemeat of often underfunded public pension plans. Unemployed workers have swelled the demand for welfare and Medicaid services. Governments that were frugal in the past are just squeaking by. Governments that were lavish in the good times, building their budgets on optimism and best-case scenarios, now risk being wrecked like a shantytown in an earthquake.

. . .

Many taxpayers might say that it's about time spending dropped. But then they start hearing the specifics. Government budgets contain a lot of fixed costs and herds of sacred cows. K-12 education absorbs nearly a third of all spending from state general funds. Add medical expenses, primarily Medicaid, and it's over half. Prisons must be maintained, colleges and universities kept open, interest on bonds and other loans paid. Real cuts provoke loud howls, and you can hear them rising in every corner of the country.

. . .

On the grand scale, this fiscal fiasco is playing out in California and New York. Both states boast economies far larger than that of Greece, which so disturbed the world economy this spring. And both are paralyzed by structural deficits far larger than their politicians seem able to grasp. The impasse in California between Republican governor Arnold Schwarzenegger and the Democrats controlling the legislature appears set in concrete. Last year, the Golden State was reduced to issuing IOUs; this year's budget, some $19 billion in the hole, is once again a shambles. In New York, Democrats control all the levers, but they can't find a cost-cutting deal acceptable to the public-employee unions that helped elect them. The deficit in Albany is $9.2 billion.

. . .

... this unfolding economic disaster story is in fact a series of variations on a single theme. When times were good and the future seemed bulletproof, all sorts of grand ventures were floated on waves of debt. No one cared, because everyone planned to be richer when the bills came due. The arbitrageurs of leveraged derivatives, the cash-strapped subprime home buyers, the government grandees issuing bonds and boosting pensions — all were versions of the same doom-shadowed figure. Only if the bubble burst would the bills become unpayable. How did so many people forget all at once that the bubble always bursts?

. . .

Now larger issues and harder choices are being laid bare, beginning with the sprawling mess that is Medicaid. Created by Congress, administered by the states and paid for by a patchwork of federal, state and local governments, the health care system for America's poor is a jumble in the best of times. With enrollments growing rapidly, that jumble is becoming a train wreck.

. . .

What's going to give? Prepare for a free-for-all. The states are pressing Washington to maintain the emergency Medicaid supplement that was part of the stimulus package. So far, congressional moderates are blanching at the price tag. If the Beltway budget hawks win that battle, states plan to squeeze the patients, who are currently protected by strings attached to the stimulus money. No federal supplement means no more strings. Already various states are contemplating tighter eligibility rules, lower benefits, higher co-pays and other restrictions. And then there's the ongoing fight between the states and the medical system. Governments are wringing money from doctors and hospitals coming and going: first they are cutting payments for Medicaid services, and then they are raising fees on Medicaid providers.

Just as ugly is the issue of public-employee pay and benefits. The mess in New Jersey is just an extreme example of a widespread problem: many state and local governments have made the mistake of courting the votes of public employees by fattening salaries and benefits, all the time imagining that pension-fund investments could only go up. Tales of lavish retirements for relatively youthful public servants have been making a lot of headlines lately. The New York Times reported that some 3,700 retired New York State public employees earn more than $100,000 a year in pension payments, including a former policeman in Yonkers at the ripe old age of 47. California's pension poster boy is a Bay Area fire chief who, at 51, was collecting more than $241,000 a year in retirement pay. The Pew Center on the States, a nonpartisan research group, estimates that states are at least $1 trillion short of what it will take to keep their retirement promises to public workers. Two Chicago-area professors recently calculated the shortfall at $3 trillion. According to Pew, half the states ran fully funded pension plans in 2000, but by 2008 that number had dwindled to four.

It's tough to cut the benefits of police officers, firefighters and schoolteachers. But the long recession has cast a glaring light on the fact that public and private workers increasingly live in separate economies. Private-sector employees face frequent job turnover, relentless downsizing, stagnant wages and rising health-insurance premiums. They fund their own retirement through 401(k)s and similar plans, which rise and fall with the tides of the economy. Many public-sector workers, by contrast, enjoy relative job security, and the number of government jobs rose even as the overall unemployment rate shot just past 10%.

. . .

In sun-drenched San Diego ... a grand jury probing that city's troubled finances found a recurring practice of skipping required payments to the city's pension fund while simultaneously awarding ever more generous pensions to public employees. Legal? Apparently. Prudent? Nope. A once solvent system is now billions of dollars in the red. The grand jury raised a scarier question: Is San Diego still a "viable" financial entity?

Indeed, the B word has crept into so many conversations in communities around the country that a number of investors are worried that municipal bonds have become the latest debt-fueled bubble ready to burst. California's public-employee unions are lobbying for a bill to ban government bankruptcies entirely, so worried are they about the possibility of widespread defaults to escape pension obligations. Perhaps more worrisome, though, is the risk that all this calamity will ultimately produce little in the way of lessons learned.

There's much more at the link. Essential reading, IMHO.

What Time magazine doesn't say, but what is only too evident from the article, is that this entire mess is the result of a single policy, or trend, or political vision: statism. There are many definitions of this ideology, but they all boil down to the belief that the state is greater than the sum of its parts (i.e. the people); that the people exist to serve the interests (and pay the bills) of the state; and that the people can (and should) rely on the state to look after them, to safeguard their interests, as a quid pro quo for their support.

Unfortunately, that vision has degenerated into a cesspit of political corruption. State benefits and handouts have become nothing more or less than a bribe, a tool wielded by corrupt politicians to favor particular interest and pressure groups, paying for their votes with the taxes of others. The interests of political parties have been elevated to a higher position, a greater perceived value, than the interests of the state and/or the citizen, until incumbent politicians so confuse them as to render them indistinguishable. They'll do anything, use the resources of the state and/or exploit the people in any way possible, to advance their political agenda, whether or not it's in the interest of the state or the people to do so. After all, they reason, what's good for our party / our incumbents / me personally (pick any or all that apply) is what's good for the state and the people! They've come to believe that lie so completely that they're sometimes genuinely astonished that not everyone agrees with them.

The real losers in all of this are the sober, reliable, solid citizens of the state. They pay their taxes (often at exorbitant rates); they obey the laws; they try to 'do unto others as they would be done by'; and their elected politicians, more often than not, laugh at their naïvety as they screw them again and again and again, politically speaking (and sometimes physically too).

Statism is a mug's game. To rely on any human institution to act in loco parentis to us is foolish in the extreme. The only answer that has worked throughout all of human history has been for citizens to take responsibility for their own actions, and demand that their leaders do the same, and if necessary to rise up and throw out the leaders who've been trying to avoid doing so. As long as we permit our government - local, state or national - to get away with fiscally suicidal policies, particularly taking more and more money from contributors to society and disbursing it to leeches, those who are nothing more than drains on society, we are basically abdicating our responsibility.

It's long gone time that we demanded our governments exercise fiscal responsibility: spend no more than they take in; restrict taxation to what's necessary to fund essential government functions; cut bloated expenditure (particularly in areas where years of spending has failed to produce any measurable improvement, such as many education programs); and eliminate service conditions and privileges for state employees that are not available to or enjoyed by those in the private sector (who are, let's remember, the productive citizens paying the salaries of state employees in the first place!). If they'd done so for the past few years, there would be no, repeat, no budget crisis whatsoever in our states. We - and they - would be solvent.

Fundamentally, the mess in which our state governments find themselves is our fault, for failing to do our duty as responsible citizens and abdicating that responsibility to statist politicians. We've let them get away with the fiscal equivalent of murder for far too long . . . and boy, are we paying for it right now!

Peter