Why do states have balanced-budget rules?

[liberalpragmatist]

Every time there's a recession, state governments go into the red and they're forced to cut program after program.

If government, in recessions, can act as a spender-of-last resort, then why shouldn't state governments be able to? The federal govt., of course, is able to, and though the lack of balanced-budget rules can be a problem, overall many economists would agree that forcing balanced budget rules on the U.S. government would be harmful.

So why can't state governments do deficit spending? Why can't they borrow or sell bonds? Is there any reason why at least larger states like NY and Calif. couldn't borrow money?

I'm asking because I genuinely don't know: are the rules forcing states to have balanced budgets purely political or are they necessary for institutional or economic reasons?

[eleny]

1. I don't know but yesterday I was guessing that the Fed can't do it....

.... because nations go to war and states don't (civil war doesn't factor into this issue). When states face emergencies, they can appeal to the Fed for help. When the Fed faces an emergency or conflict there's nowhere to go but to borrow and run a deficit.

[smiley_glad_hands]

2. Its in the VA state constitution, and varies by state, not all states have the requirement -

of no deficit spending, though I can't think of any off the top of my head. States do sell bonds, so do localities, problem is getting someone to buy them pending the credit rating.

Oh yeah: States don't print there own money.

Further, who enjoys saddling there kids with debt?

[ProgressiveProfessor]

3. Becasue they can not print money.

[lib2DaBone]

6. Bingo.. the Fed can print money. States are on their own.

So then, why do States listen to the Federal Govt? Just to get the cash ( a given among crooked politicians). But aren't State's Rights Stronger?

Oh.. I forgot.. we had a little war in 1865 about this topic......

[ProgressiveProfessor]

9. States are supposed to save for a rainy day and that sort of thing

I saw California Governors raid CALPERS a few times until laws were passed to stop it.

[louis-t]

4. It's in MI Constitution, too.

I think it has a sunset clause that has to be renewed every so often.

[Greyhound]

5. Because, they fell to a nationwide propaganda campaign carried out in the 80s.

VA, as an example mentioned in this thread, got it's "balanced budget" amendment in 1986.

They are simply one of the devices used to force states to comply with the reich-wing mandate to fuck over citizens in favor of big business.

[Still Sensible]

7. Actually, those laws tended to spring

from what used to be conventional wisdom in economics and from anti-big government dogmas. Remember Reagan's creed "Government is not the solution, it's the problem."

When I was in school we were taught that deficit spending was the (not one of the, but THE) cause of inflation. No question. Of course, that formed the basis of much of the economic tripe that supply siders have spewed for decades. Anyway, especially as the anti-big government, so called fiscal conservatives came to power in the 70s and 80s, more and more states passed balanced budget statutes and amendments. In many cases, these were sold to the public as a way to keep the out-of-control tax and spend liberals under control.

It was wonderful irony that it was Reagan's administration that disproved the direct correlation of deficit spending and inflation. And of course, fiscally conservative republican is now an oxymoron for all intents... although some of them still claim that characterization.

[Igel]

8. You'd think they'd learn.

Every recession, they go in the red and cut budgets.

Usually the economic predictions aren't great, and they still assume no reduction in revenue; late in the fiscal year they suddenly realize the need to cut spending. Then they find they could have cut the budget by 5% at the start of the year, or by 30% 4/5 of the way through the year; still, they invariably decide to set things up for the deeper cuts.

Moreover, when the recession's over and revenue's increasing again, they know that there'll be another recession in a few years, and that the fiscally wise thing to do is to only moderately increase spending the first year and put aside enough money to cover that spending increase for two years. The second year they can increase spending again, as long as they have enough money set aside to cover *that* increase in spending for a couple of years. Then there'd be a rather large cushion to accommodate recessions without cutting programs.

Except that in both cases politics screws over the citizenry, which act stupid: In the former, the politicians don't want to cut programs because if they do, they don't get rewarded with votes. It's esp. bad in an election year--and most years there's an election for something partisan. So they don't cut programs until it's too late, and the cuts have to be deeper than necessary--not a problem, as long as they can blame somebody else. In the second case, a politician can't stand the sight of money unspent that could be spent to bolster his (or her) changes for re-election, or to implement his/her value system, or to promote his/her ideology. Have a reserve fund that's not serving the constituency? Horrible, it must be spent, there's an election and a politician has to be able to say how many people he's "helped" by legally compelling others to do stuff.

In any event, you don't want states to borrow money: It's much easier for a state to have a recession when the rest of the country doesn't have one. The federal government can average such things out; the states usually can't. A single state can also be a bit loonier than the country as a whole, a bit less stable (because, again, it's a smaller sample so averages are less stable). Moreover, they have a different kind of bond funding system, since they don't have a treasury department and can't regulate their economies or control their borders to nearly the same extent as the feds try.

The feds' ability to run a deficit is too extreme and should be curtailed, IMO, before the financial world curtails it by simply not buying the debt that's offered--with the consequence that there's no leeway in borrowing even if it's an absolute necessity, leaving the government with the choice of ignoring the necessity or encouraging extreme levels of inflation.

[lib2DaBone]

10. Thanks Igil.. very informative....

[lib2DaBone]

11. Wow.. can't help reflect on Dick Cheney,"Deficits Don't Matter".