Spending Bubble

May/24/2011 16:58PM
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Every day you hear or read about a government run financial problem. Today, it was the student loan default rate. Now that Obama has taken control of all student loans, guess what’s happening? Right, you walk in the door and fog a mirror and you get a student loan. The result, as always, more and more defaults. In dollars, this is a small problem, but it shows the genesis of the bigger ones. When government takes over most things, costs go up and controls go down.

The biggest issue now is the state budget problems. They got a lot of help from the stimulus money, money that is no longer available. Statistics show the states have over $1.8 trillion in taxpayer-supported obligations. Most of this is underfunding for post-employment benefits. When you read that lifeguards in California are making over $200,000 year, does it surprise you that the number is $1.8 trillion? When you see statistics that show the average state employee in California who retires at age 62 with over 30 years of service will receive $1 million in pension dollars based on the actuarial tables for a married couple?

There is no collective debt ceiling clock for the 50 states, but if there were one, it must be ticking pretty fast these days. Over the past three years the combined state budget shortfall is $400 million.

State spending is 12% of the GDP and 15% of the workforce.

States have been raising taxes, issuing debt, and juggling budgets to keep from defaulting. States, like Illinois, on top of the list of worst states from a fiscal perspective, are paying ransoms to keep big employers from moving out of the state. Ransoms they don’t have the money to pay.

It’s a race to see who will default first. There have been some recent increases in state revenues, but those are small compared the increases in obligations.

The state budget obligations and pension shortfalls are a true house of cards. More so, that with exception of a few states that have escaped the problems, like Texas, Oklahoma, Alaska, and South Dakota, and a few that are addressing the problem, like Florida, Michigan, Wisconsin, and New Jersey, the rest are running in place.

Illinois is the classic example. The state raised the income tax level to cover these shortfalls, then increased the spending to use the increased tax revenue.

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