One Prescription: Budget Cuts

In the last month, as the economic wreckage of the pandemic has become clear, state after state has announced new budget cuts. Liberal darling of the moment Andrew Cuomo has led the way. His recently passed budget cuts funding from Medicaid while transferring fiscal responsibility for many health care initiatives to counties and cities, who will have to pay for the new responsibilities with regressive sales taxes.

Most ominously, however, Cuomo’s budget takes the extraordinary step of empowering his Republican budget director to make further cuts throughout the year. Cuomo has been quite explicit about the need for further cuts, arguing that, “you can’t spend that which you don’t have. You can’t do that in a family. You can’t do that in a business. You can’t do that in government.”

Other states are following suit. In Washington, Jay Inslee, another governor who is these days receiving plaudits from MSNBC, announced half a billion dollars in cuts, the single biggest component of which is to a program that puts more counselors in high-poverty school districts.

In Virginia, Ralph Northam has ordered a state hiring freeze. In Kentucky, the new budget cuts all state aid to libraries (a crucial source of internet access for poor Americans). At least a dozen other states have announced cuts.

Part of the blame for these cuts lies with the stimulus package. While it directs about $150 billion in aid to state, local, and tribal governments, this aid is earmarked for expenses incurred as a result of the pandemic itself, and not its economic effects. By contrast, the 2009 stimulus bill directed about $140 billion to states and local governments. As state governments are battered by the combination of pandemic expenses and plunging revenues, the federal government is offering little help.

Invisible Austerity

Without increased aid from the federal government, states have few resources for dealing with a recession. Forty-two states have constitutional provisions requiring balanced budgets, while the others (except Vermont) have statutory requirements. In general, the vast majority of state and local debt is devoted to financing infrastructure. For tasks like maintaining payroll to ensure services are available during a recession, borrowing is forbidden.

This requirement is particularly devastating in the United States because state and local governments make up such a large share of total government spending; a good chunk of the federal budget is actually granted to state and local governments. If that spending is attributed to state and local governments, who are the ones who ultimately spend it, state and local expenditures are about equal to the federal government, excepting defense.

A huge amount of public service provision is run through the states. Public education is entirely a state local enterprise, supplemented only minimally by federal dollars. The same is true of health care, with state and local governments operating hospitals and clinics (though here federal money plays a bigger role through Medicare).

The welfare system is also operated largely through the states. States run unemployment offices, even when they are supplemented with federal money. States also administer Medicaid programs, with wide latitude over measures like work requirements. Welfare was handed over to the states by Bill Clinton’s welfare reform legislation, and now states spend welfare money not on aid to poor citizens, but on boondoggles like marriage promotion.

All of this means that the very services people rely on most in a recession are located administratively in entities that are institutionally precluded from adequately funding them during a recession. While states could raise taxes to plug budget holes, few governors would want to pursue these kinds of deflationary measures during a recession. Bound in a fiscal straitjacket by balanced-budget requirements, their only option is to cut.

Even as the United States pursues expansionary fiscal policy on the federal level, its federalist structure of governance ensures that austerity will be pursued at the lower levels of government. While media coverage focuses on quantitative easing, the national debt, and budget cliff showdowns, austerity proceeds silently in the states.

Lost Decades

The austerity that states are promising right now comes after a decade in which state budgets were punished by the fallout of the financial crisis. State budgets fell sharply from 2008–10, and aggregate state tax collection only reached precrisis levels in 2013. Still, as of last year, fully half the states were still spending less, in inflation-adjusted dollars, than they were before the crisis. In per capita terms, spending was even lower.

The effects of this decade of austerity have been manifold. Total employment by states, not counting education workers, is still about 5 percent lower than its precrisis peak. Infrastructure spending by states, as a percent of GDP, is lower than any time in the last sixty years. On the most basic level, even before the pandemic hit, states were providing fewer services than they had a decade earlier.

This decade of austerity was felt particularly sharply in education. As of last year, most states were spending less on education than they had in 2008. Even as enrolments in primary and secondary schools grew by 1.4 million students over the past ten years, there are actually a hundred thousand fewer K–12 education jobs than there were before the crisis. At the same time, teacher pay stagnated, leading to the explosion of strikes by educators in 2017–8.

In higher education, austerity made itself felt as well. State spending on colleges and universities never came close to recovering from 2008. As a result, tuition surged to make up the difference, growing 35 percent on average over the decade. In Louisiana, tuition doubled to make up for particularly draconian cuts. Even as late as the 1980s, tuition provided only about 20 percent of public college funding. Today, it’s about 50 percent. This progressive defunding of public higher education is the root of the student debt crisis.

Cut to the Bone

The states today are, on paper, better prepared for the upcoming recession than they were a decade ago. State budget reserves are considerably stronger now than they were then, but it would be naive to conclude that the impending cuts will be less devastating than in 2008.

For one thing, the scale of the crisis is bigger. With unemployment already higher today than it was at the trough of the recession, state budgets are going to come under higher levels of strain than they did in the financial crisis. Moreover, the coronavirus crisis is going to require major spending by states and local governments on everything from medical care to corpse disposal.

Most fundamentally, however, the preceding “lost decade” of state budgets has meant that states have little room left to cut. Schools are already packing more students in per classroom than they were before the crisis. State workforces are already at bare-bones levels. Infrastructure investment is already far too low. The cuts of the upcoming years promise to intensify all the failed state dynamics being exposed in American life.

James Buchanan would be proud. For much of the US government, democracy is enchained, locked down by absurd fiscal structures that prevent the state from responding to the needs of the population. If the country’s descent into even deeper levels of barbarism and dysfunction is to be avoided, these chains will have to be shattered.