4 ms·

When issues of local government financial problems come up, I think it's important to remember that local governments are typically not able to undertake defici

When issues of local government financial problems come up, I think it's important to remember that local governments are typically not able to undertake deficit spending the way the Federal government is. If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government due to bad budgeting. It would also be a lot harder for our leaders to start wars or get away with sloppy cost estimates of their grandiose ideas. My argument is not that government should be small, simply that its spending should reflect its income and the results of its spending should be easily correlated with their cost. Since the Federal government takes the lion's share of income taxes, local governments are constrained in their ability to generate income. Yet for most people, local governments provide the vast majority of the useful government services they enjoy. So while it may seem that the Federal government is comparatively stable and responsible, the reality is that it's simply far less accountable to anyone and is able to use that lack of accountability to launder its reputation. States (or local governments) do not have the same luxury.

dragonwriter 9y ago
> If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government. No, there's just be a lot more pressure to monetize government finances. We have some safeguards against that (e.g., the Fed being separated from Congress and outside of it's direct control), but the biggest constraint on that is that the government, so long as Congress is free to set fiscal policy within it's own preferences, has very little reason to choose the path of monetization.
- grandalf 9y ago
  I completely agree that our leaders would exploit loopholes. My point was meant mainly to describe the scenario if the Federal government were effectively constrained. Would the public have supported a tax increase in 2004 when the cost of the Iraq war began to drastically exceed estimates? Likely not, we'd have brought everyone back home and saved Trillions and prevented a significant amount of loss of life.
Spooky23 9y ago
Very true. Puerto Rico is a look into the future. Illinois and other states are <20 years away from the same fate.
- echelon 9y ago
  Which states are at risk of default?
  - Spooky23 9y ago
    Right now everyone is solvent. But as more Medicaid costs shift to states and they have to face their underfunded or unfunded pension obligations, things will get nasty. Iirc, New Jersey (recent governors have balanced the cash budget by suspending pension fund payments), Massachusetts and Illinois are in the worse shape. Other states are a mess, but are more sound. New York pension obligations are guaranteed by the state constitution, and pension contributions have taken place but the high taxes and presence of Wall St have mostly funded the obligations. (They do have an issue with the low interest rate environment and expectation o 7% returns)
stephen_g 9y ago
Really, the Federal Government must deficit spend for the private sector to be able to save in the presence of a current account deficit. It's actually just accounting, derived from the definition of GDP itself (it's called the Sectoral balances equation, see Godley & Lavoie 2012 but also around the Internet). If the Government doesn't deficit spend (or run large enough deficits), the only way the private sector can grow (as a whole) is by taking on more debt - which was the case before the GFC. But as soon as the lending slowed and stopped as the private sector stopped being able to take on more debt, a huge source of demand disappeared and the economy tanked. This actually very neatly explains the GFC as well as Japan's crash in the 80s, and even the Great Depression. It's no coincidence that the worst financial crashes have come after some of the most successful runs of surpluses! This was actually the main sign seen by most of the analysts and economists who warned of the GFC in the years running up to it (there were 11 identified by Dirk Bezemer in 2009 who qualified a set of conditions under their research). Sectoral Balances explains quite neatly also why austerity never work (unless you have a big trade surplus) - the more Government spending that is cut, the more that growth is reduced. So deficits aren't really discretionary for the Federal Government, but are more determined by the economy. If you cut the deficit while the economy is performing badly, growth suffers and revenue is reduced (of course, the flip-side is that too-large a deficit would be inflationary). The deficit should approach zero as the economy reaches full employment and full capacity/efficiency - but most economies aren't really anywhere near full employment.

dragonwriter 9y ago

> If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government. No, there's just be a lot more pressure to monetize government finances. We have some safeguards against that (e.g., the Fed being separated from Congress and outside of it's direct control), but the biggest constraint on that is that the government, so long as Congress is free to set fiscal policy within it's own preferences, has very little reason to choose the path of monetization.

grandalf 9y ago
I completely agree that our leaders would exploit loopholes. My point was meant mainly to describe the scenario if the Federal government were effectively constrained. Would the public have supported a tax increase in 2004 when the cost of the Iraq war began to drastically exceed estimates? Likely not, we'd have brought everyone back home and saved Trillions and prevented a significant amount of loss of life.

Spooky23 9y ago

Very true. Puerto Rico is a look into the future. Illinois and other states are <20 years away from the same fate.

echelon 9y ago
Which states are at risk of default?
- Spooky23 9y ago
  Right now everyone is solvent. But as more Medicaid costs shift to states and they have to face their underfunded or unfunded pension obligations, things will get nasty. Iirc, New Jersey (recent governors have balanced the cash budget by suspending pension fund payments), Massachusetts and Illinois are in the worse shape. Other states are a mess, but are more sound. New York pension obligations are guaranteed by the state constitution, and pension contributions have taken place but the high taxes and presence of Wall St have mostly funded the obligations. (They do have an issue with the low interest rate environment and expectation o 7% returns)

stephen_g 9y ago

Really, the Federal Government must deficit spend for the private sector to be able to save in the presence of a current account deficit. It's actually just accounting, derived from the definition of GDP itself (it's called the Sectoral balances equation, see Godley & Lavoie 2012 but also around the Internet). If the Government doesn't deficit spend (or run large enough deficits), the only way the private sector can grow (as a whole) is by taking on more debt - which was the case before the GFC. But as soon as the lending slowed and stopped as the private sector stopped being able to take on more debt, a huge source of demand disappeared and the economy tanked. This actually very neatly explains the GFC as well as Japan's crash in the 80s, and even the Great Depression. It's no coincidence that the worst financial crashes have come after some of the most successful runs of surpluses! This was actually the main sign seen by most of the analysts and economists who warned of the GFC in the years running up to it (there were 11 identified by Dirk Bezemer in 2009 who qualified a set of conditions under their research). Sectoral Balances explains quite neatly also why austerity never work (unless you have a big trade surplus) - the more Government spending that is cut, the more that growth is reduced. So deficits aren't really discretionary for the Federal Government, but are more determined by the economy. If you cut the deficit while the economy is performing badly, growth suffers and revenue is reduced (of course, the flip-side is that too-large a deficit would be inflationary). The deficit should approach zero as the economy reaches full employment and full capacity/efficiency - but most economies aren't really anywhere near full employment.