States’ financial woes are leaving lawmakers few options in balancing budgets.  Here in Minnesota, we’re delaying payments to schools, cutting medical programs and shorting local governments, forcing municipalities to raise taxes or severely cut basic services.  This has gone way beyond belt-tightening into structural disinvestment with possible long-term ramifications.

This prompts the question: Why can’t states make use of simple borrowing mechanisms that the federal  government uses every day, especially in tight economic times like a recession?

Let’s think about this in the same terms that an 18-year-old and her family would use to pay for college.

As a high schooler, our 18-year-old took a series of part time jobs earning about $3,000 each year for four years.  Going into Freshmen year, she’d have about $12,000 in savings, assuming she didn’t tapped into that cash for a prom dress or any other expenses.

Being from out-state Minnesota, she’s going to need about $25,000 in yearly expenses, including room, board and tuition at the U of M. Even if she’s able to earn up to $7,000 working a part-time job, she’ll still need some loans to get her through.  And why not let her borrow against her future earnings?

But when it comes to states, we have institutions that either have very little ability to borrow or aren’t allowed to borrow at all. In the last couple of years, most state and local governments have been getting that extra boost to weather the economic storm via federal stimulus funds. But that line of cash has run out  and Congress is refusing to extend the life preserver.

Why can’t we handle this problem on our own? Because Minnesota has a law mandating a balanced budget every biennium, which means it can’t run deficits.  In theory, that’s a good thing, especially during a normal economic cycle.  But in bad economic times, we need the flexibility to make other fiscal choices.  We wouldn’t tell a student to go to college on minimum wage and pay as she goes without taking on any loans; not only would it take far longer but it would mean years of lost productivity.

Completely different, right? Not really.

Simple economics tells us that when times are bad, people have less income, which, all else being equal, means less tax revenue. At the same time, that smaller pot of money is expected to fund programs that expand as more recession-struck citizens need unemployment benefits, health care assistance, and other forms of government aid. On the national level, we can sell our debt in the form of government bonds and we can continue spending while the downturn persists. This stimulates the economy and helps minimize the pain. This part of the story is pretty familiar.

But there is a very important secondary piece of the puzzle many ignore. When times are good, the economy is booming, and we have extra cash, we must pay down that debt.  We shouldn’t have huge tax giveaways, as we saw earlier in this decade.  We also need to invest in schools and infrastructure when money is thick.  Irrationally demanding that states balance their budgets during recessions along with long-term tax and spending cuts is costing us economic efficiency and making the recession last longer.

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Tags: ARRA, Balancing the budget, Disinvestment, federal recovery package, Jobs, Minnesota budget, recession, State Aid, stimulus, Stimulus bill, unemployment

This entry was posted on Tuesday, July 27th, 2010 at 9:15 am and is filed under Budget, Jobs & the Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.