What Is Driving State Budget Woes? Unemployment

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 . . .


Unemployment, not budget practices, to blame for state woes
Ezra Klein
Washington Post, June 22, 2010

States in Fiscal Distress
Robert P. Inman
NBER Working Paper No. 16086
June 2010

Budget deficits reflect economic conditions, not just government policy
Ezra Klein
Washington Post, June 22, 2010

Navigating the Fiscal Challenges Ahead
Fiscal Affairs Department, IMF, MAY 14, 2010

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