The June 16, 2003 issue of BusinessWeek contained one of the more “intriguing” articles on the current fiscal crisis most state governments are facing. In the piece titled “Spending Isn’t The Problem: State and Local Governments Need Productivity Gains,” author Michael J. Mandel argues that “there’s no evidence that state and local spending is out of control.” While I wouldn’t dispute that government needs productivity gains, I have a smidgen of a quibble with the notion that the current mess isn’t the result of out-of-control spending.
To make his argument, Mandel narrows the focus from total state and local spending to state and local employee hiring and pay. He then further narrows it to exclude public education and criminal justice employees, and concludes that state and local government employment “has grown only 8% since 1993.” Given that public education (excluding higher ed) and criminal justice constitute almost 53% of said employees, it’s a bit like saying expenses for Major League Baseball haven’t grown that much in the last 10 years if you exclude salary costs.
Regardless, to focus only on employee costs is to miss the bigger picture. To fully address the spending problem requires examining total spending. If we examine the period from 1992 to 2000 (the year before the fiscal crisis began), U.S. Census data reveal that state and local expenditures rose more than 24% after controlling for inflation. With that kind of increase in only eight years, it is little wonder that a minor recession results in a major fiscal crisis.
To get an even better sense of the budgetary bloat, consider what the fiscal picture might look like today if spending had been limited to increases in inflation and population growth. Over that eight-year period the cumulative savings to taxpayers would have been just under $500 billion. State and local spending in 2000 would have totaled $1.56 trillion, $187.6 billion less than the amount actually spent. That last number is key because state governments currently face a collective deficit of roughly $85 billion.
Mandel not only misses the big picture on spending, he also reinforces some myths about state-level tax cuts: “While many states cut income tax rates in the 1990s,” he writes, “the combined state and local tax burden, including property and sales taxes, is near an all time high.” What this quote tends to reinforce is that states cut taxes heavily during the 1990s. But this isn’t true. Consider that the four largest sources of revenue for state and local government are property taxes, sales taxes, personal income taxes, and corporate income taxes. If one balances the number of times states cut these taxes in the 1990s against the number of times they increased them, the tax cuts come out ahead by only 3. It would be wise to cast a skeptical eye toward those pundits who blame the current state fiscal crunch on tax cuts.
Finally, Mandel appears to suggest that some of the spending increases are mitigated because “the only real increases in spending and employment have come in fields voters really wanted: education, criminal justice, and medical care.” Indeed, it is generally accepted by the media that the public wants increases in these areas. But the question that is never addressed is how much of an increase? The American National Election Study — a public opinion poll — routinely asks respondents a question about government services vs. spending. It requires respondents to pick a number on a seven-point scale, with one meaning the respondent wants government to provide fewer services and reduce spending a lot, and seven meaning he wants more services and large spending increases. In the middle of the 1990s, nearly two-thirds of respondents answered near the middle — 3, 4, or 5 — suggesting that the majority supports moderate amounts of services funded through moderate spending increases. After controlling for inflation, from 1992-2000 state and local governments increased spending on education (excluding higher ed), criminal justice, and medical care by 30.1%, 35.1%, and 18.3%, respectively. Perhaps it depends on what the definition of “moderate increase” is.
State and local governments spent their way into this current mess, and the way to get out of it is to spend less. Unfortunately, most will probably take the easier route of tax increases.