Tom Patterson

Federal stimulus money makes state budget deficit worse

Posted on October 29, 2009 | Author: Tom Patterson
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State Rep. Kyrsten Sinema recently rebuked U.S. Sen. Jon Kyl in the pages of the East Valley Tribune for recommending that "stimulus" funding be terminated. The federal government, by spending $308 million on infrastructure in Arizona, is providing a "much needed economic boost" to the state, she claimed.

Nobody can say for certain what might have happened without this $767 billion handout. But economic downturns always work themselves out. Markets are inherently self-correcting. In fact, there is a strong possibility that the massive bailouts and market manipulations by the U.S. Treasury and Federal Reserve have lengthened and deepened our current recession.

But there's another, more fundamental problem with the "stimulus" program. It isn't paid for with real money. The federal government is simply sharing the use of its magic printing press with the states for a while.

Printing trillions of dollars to pay for today's wishes is wretched economic policy. When the stimulus money runs out, states will be in worse shape than ever because of the program expansions required to obtain the stimulus funds. Sooner rather than later, states will be forced to face the bitter reality of a "near permanent reduction in state revenues that will force us to reduce the size and scope of our state governments," according to Gov. Mitch Daniels of Indiana, writing in the Wall Street Journal.

Like many individual Americans, many states spent extravagantly in the good economic times of this decade, making no provision for the future. Arizona unfortunately was one of the worst offenders. Now, that future is here. States are banking on an economic rebound, but gross domestic product growth would have to average 7 percent, twice the historic average, for revenues to be restored to their previous level by 2012.

In response to declining tax revenues, more than half the states have raised taxes. But today's mobile individuals and businesses simply flee states that try to sock it to them. Beneficiary states are like Indiana, where state spending has been severely reduced and the tax climate is business-friendly. This year alone, more than 30 businesses have moved from tax-and-spend states to Indiana.

Yet Arizona Gov. Jan Brewer still insists on protecting state spending as much as possible by raising taxes. But she's just postponing the day of reckoning. There is no choice but to fundamentally reduce the scope of state government or face permanent economic decline. Daniels notes that "wishing for an improbably huge boom while chasing your own tail through self-destructive taxes won't prove much of a strategy." Is anybody listening?
 
Tom Patterson is chairman of the Goldwater Institute and a former state senator. A longer version of this article originally appeared in the East Valley Tribune.
 
Learn More:
 
Goldwater Institute: Saving with Systemic Change
 
East Valley Tribune: 'Stimulus' only postpones day of reckoning
 
Wall Street Journal: The Coming Reset in State Government

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