Wednesday, August 11, 2010

States Should Reject $26.1 Billion Bailout

By Robert Romano

States should say, "thanks, but no thanks" to Nancy Pelosi, Harry Reid, and Barack Obama's latest $26.1 billion bailout, and instead restore fiscal sanity to their bloated budgets. It's time to cut spending, not to attempt to sustain the unsustainable.

The bailout includes $10 billion for public sector jobs, including teachers, which the states cannot afford. And $16.1 billion for Medicaid spending, which, again, the states cannot afford.

Making matters worse, federal "stimulus" has been distorting state budget processes, and forestalling the states' day of reckoning. According to the Los Angeles Times, "Many states had already counted on the extra federal aid in their spending calculations".

How irresponsible is that? States are in such a desperate situation that when they crafted their budgets this year, many of them included funds that had not even been appropriated yet by a Congress they have no control over. That's like borrowing against future projected stock price appreciation.

For Fiscal Year 2011, CNN reports that states face $180 billion in shortfalls. Compared with prior years,according to Sunshinereview.org, state budget shortfalls totaled $113.2 billion for FY 2009, and then rose to $142.6 billion in FY 2010. So, state budget pictures have been worsening on an annual basis.

Particularly hard hit by this year's deficits are, unsurprisingly, the most densely populated states in the nation. California currently faces a $20 billion shortfall. On the east coast, New York faces a more than $8 billion deficit, and New Jersey too faces a $11 billion deficit for 2011.

Now, flush with new taxpayer funds, these states will not have to make certain necessary cuts. Instead, they are being given a free ride for another year. Opponents of last year's $862 billion "stimulus" warned that the state bailouts included — which turned out to be $145 billion — would quickly become a permanent line on the federal budget. Critics predicted that the economy, and thus revenues, would not recover.

And they haven't. The economy is slowing down again, to 2.4 percent estimated growth in the second quarter, down from 3.7 percent in the first quarter, according to the Bureau of Economic Analysis. Unemployment remains high at 9.5 percent.

Even the New York Times' Bob Herbert rightly quotes Charles McMillion, president and chief economist of MBG Information Services as saying that if 1.115 million workers were not removed as a statistical matter from the Bureau of Labor Statistics calculations of the civilian labor force, "simple arithmetic shows that the official unemployment rate would have risen from 9.9 percent in April to 10.2 percent in July".

The meager 71,000 jobs the private sector created in July does not even keep up with new entrants into the workforce, which Herbert notes is between 150,000 and 200,000 a month.

"We are not even beginning to cope with this crisis," Herbert alarmingly writes, adding, "The economy is showing absolutely no sign of countering the nation's jobs deficit."

So, while the federal and state governments struggle to keep their workforces at pre-recession levels, the private sector is being obliterated and job growth is almost non-existent. It's time to ask why.

$4.3 trillion in new debt has been created since Nancy Pelosi and Harry Reid took control of Congress in 2007. The Federal Reserve has more-than doubled the money supply since the housing bubble popped in August 2007. With all of this "stimulus," fiscal and monetary, why is it that the economy is still not recovering?

Take the new debt that has been created. Instead of investing in the economy and jobs, $4.3 trillion has been invested in treasuries, which finances government spending. And what has the Fed invested in? Well, they own about $777 billion of treasuries, and $1.117 trillion in Fannie Mae and Freddie Mac mortgage-backed-securities. More money, albeit monopoly money, that might have been invested in productive areas.

And they're not through yet. The Fed is set to purchase another $300 billion in treasuries, according to the Hill. They say that will keep $300 billion in the economy. But is government the best place to invest money in the economy? Or is that money being misallocated away from the private sector?


This is nothing more than a useless paper trade. And it is burying the American people under a mountain of debt.

States should be paying close attention to these developments. Revenue from property taxes, which largely funds state budgets, is not coming back. Government jobs that came about because of the housing bubble — and higher property tax revenue — are unsustainable. They need to be cut.

Not even the federal government, with trillions of new dollars thrown from helicopters, can reinflate the housing bubble. Nor can it even afford its own profligate spending, as evidenced by the Fed's growing investment in the national debt. So by no means can it afford to print more money to balance state budgets.

Barack Obama is fond of saying that he inherited the greatest economic crisis since the Great Depression. But what he misunderstood was that the crisis was not a shortage of money requiring fresh ink and paper from the nation's central bank. Rather, the crisis was and is a solvency crisis, and creating more debt both at the federal and state levels will not solve it.

It will only compound it. The states should do everyone a favor and reject this latest $26.1 billion bailout — before the nation goes completely bankrupt. Now is the time to make cuts, not excuses.

Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau.

http://blog.getliberty.org/default.asp?Display=2539

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