What Is Driving State Budget Woes? Unemployment

June 23, 2010 12:00pm by Barry Ritholtz

Alternative title: Economic catastrophes are hard . . .

We have been hearing lots of noise lately about state and sovereign deficits, especially from the newly minted deficit hawks in the US. So I took special notice of the Washington Post’s Ezra Klein recent discussions regarding the various States fiscal crises (here and here).

Klein cites Wharton prof Robert Inman, who identifies Unemployment as the single biggest factor impacting States fiscal crises: “The good news from this analysis is that the states’ fiscal crises of 2009 do not appear to be linked to any obvious structural or institutional failures in state finances. It’s the economy.”

Klein distinguished between States’ policies and economic conditions:

“A set of policies that were balancing state budgets in 2004 and 2005 and 2006 and could’ve survived a mild recession but weren’t able to hold the line against a once-in-a-generation economic storm aren’t bad or profligate policies: It’s just hard to endure economic catastrophes, and you wouldn’t necessarily want to orient your economic policy around long-tail events. A pension program that was started in the early 1900s and that’s worked pretty well but will run a temporary deficit when an uncommonly large generation retires isn’t a poorly designed pension program.”

There is additional evidence to back this up: An IMF report analyzing sovereign deficits, and an NBER Working Paper titled States in Fiscal Distress.

The bottom line is that deficits reflect both government policy AND economic conditions. You cannot intelligently analyze or criticism one without recognizing the impact of the other . . .

Sources:
Unemployment, not budget practices, to blame for state woes
Ezra Klein
Washington Post, June 22, 2010
http://voices.washingtonpost.com/ezra-klein/2010/06/unemployment_not_budget_practi.html

States in Fiscal Distress
Robert P. Inman
NBER Working Paper No. 16086
June 2010
http://papers.nber.org/papers/w16086

Budget deficits reflect economic conditions, not just government policy
Ezra Klein
Washington Post, June 22, 2010
http://voices.washingtonpost.com/ezra-klein/2010/06/budget_deficits_reflect_econom.html

Navigating the Fiscal Challenges Ahead
Fiscal Affairs Department, IMF, MAY 14, 2010
http://www.imf.org/external/pubs/ft/fm/2010/fm1001.pdf

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client. References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers Please see disclosures here: https://ritholtzwealth.com/blog-disclosures/

twitter

facebook