Capital Ideas Blog

The state of state budgets is dismal

By Robin Mordfin
August 28, 2014

From: Blog

Living on borrowed money has become a habit in the United States. As of this month, the average American household credit card debt stands at $15,480, and in total, American consumers owe 11.74 trillion. And the problem goes way beyond personal finances.

State governments also carry big debt, and they’re not doing much to change that according to the IGM Economic Experts Panel. In October of 2012, 98 percent of the panel agreed that many US states and local governments understate their pension liabilities. A similarly large number also agreed that these same governments face austerity budgets, bailouts, and defaults if their taxation and spending habits don’t change. The problem is, nearly two years have passed and the members of the panel don’t seem to see much improvement.

“Unfortunately, current spending appears to trump properly funded pensions when it come to seeking reelection,” noted Yale’s Larry Samuelson. These two budget statements were again presented to the panel this week, and again, the economists asserted their concerns for the future. The responses this time around were similar, with many echoing Stanford’s Darrell Duffie notation with his “strongly agree” vote that “The excess liabilities are large!”

The wasted time seems to have weighed heavily on some of the dismal scientists, who responded with dismal humor. “‘Waiting for money from the tooth fairy’ wasn’t included on the list,” said Chicago Booth’s Austan Goolsbee. “Hope springs eternal, but the alternatives look bleak,” added Samuelson.

One change from the vote two years ago is that on the question of the future of these governments, undecided votes grew from non-existent to 14 percent. But, as happens often in these polls, the issue was semantics—not optimism. “I don’t like vague words like severe,” commented Kenneth Judd of Stanford with his undecided vote. Similarly, the University of Chicago’s Robert Shimer remarked, “True for some states, I don’t know if it is true for ‘many’ states.”

Illinois, which has a nearly $100 billion unfunded pension liability, was the focus of several comments. “Illinois is doing its best to be the first to have to face these choices,” said Chicago Booth’s Anil Kashyap. “Illinois is an obvious example for which this is true,” said Shimer.

As debt increases in every corner of the US and world economy, concern over the future grows. It is up to voters and their elected officials to start making the changes that will make it look a little bit brighter.