Our Banana Republics
The Washington Post
By Paul Krugman
July 30, 2002
New Jersey has always been a good state for scandals, and last week provided two. One, the case of Web-snooping by a Princeton admissions officer, which involved a total of 11 applicants to Yale, was the subject of front-page stories across the nation. (Disclosure: I'm a Princeton professor.)
The other further revelations about the way dishonest budgeting by former Gov. Christie Whitman crippled the state's finances has dire implications for all of the state's eight million people, who face the prospect of higher taxes on their houses, more potholes in their roads, fewer teachers in their children's classrooms and worse medical care for their parents. This story received no national coverage at all.
Experts already knew that the Whitman administration had used creative accounting to justify a series of tax cuts. Last year New Jersey Policy Perspective, a local think tank, released a study of fiscal policies in the 1990's titled "Take the Money and Run." Among other things, the state stopped contributing to its pension funds. This made the budget look a lot better, but created a financial hole. In an attempt to fill that hole Governor Whitman violated the basic principles of pension funds by having them engage in stock arbitrage, borrowing money to speculate on the market.
Now the state's taxpayers must make up for an investment loss of $22 billion, most of a year's tax receipts. But don't cry for New Jersey; Mrs. Whitman wasn't alone in her misbehavior.
For one thing, many corporations with pension plans used a similar trick to inflate their bottom lines. As the current issue of Business Week explains, the pension time bomb involves large numbers; I'd say it's the equivalent of at least 50 WorldComs.
Furthermore, Mrs. Whitman's policies were by no means the worst among the states. That honor may fall to Tennessee, though Alabama, where a cash crunch stopped all jury trials for awhile, may run a close second.
The fact is that in recent years many states have been run like banana republics. Responsibility gave way to political opportunism, and in some cases to mob rule. When Tennessee considered a tax increase last year, legislators were intimidated by a riot stirred up by radio talk-show hosts. Only when lack of cash forced the governor to lay off half the work force did the state, which has the second-lowest per capita taxes in the country, face up to reality.
The only reason Tennessee doesn't look like Argentina right now is that it isn't a sovereign nation; since the federal budget was in good shape until recently, there's a safety net. And the federal budget was in pretty good shape because the Clinton administration, unlike state governments, behaved responsibly. Budget projections were honest if anything, too cautious and boom-year surpluses were used to reduce debt.
But the responsibility era is over. Even as state governments face up to the consequences of cooked books in the 1990's, the Bush administration is following in their footsteps.
The latest antics of the White House Office of Management and Budget have even the most hardened cynics shaking their heads. It's not just that projections for fiscal 2002 have gone from a $150 billion surplus to a $165 billion deficit in the space of a few months; it's not just that the O.M.B. projects a much smaller deficit next year, when everyone else including the Republican staff of the Senate Budget Committee says the deficit will increase. It's also the fact that O.M.B officials simply lie about what their own report says.
"The recession erased two-thirds of the projected 10-year surplus. . . . The tax cut, which economists credit for helping the economy recover, generated less than 15% of the change." So reads the agency's press release. Yet as the Center on Budget and Policy Priorities points out, the actual report attributes 40 percent of the budget deterioration to tax cuts, only 10 percent to recession. Maybe dishonesty in the defense of tax cuts is no vice.
State governments turned into banana republics in part because voters didn't realize that a charming, personable chief executive can also be an irresponsible opportunist, seeking political advantage through policies that ensure a fiscal crisis on someone else's watch. Now the same governing style has moved to Washington. And this time there's no safety net.
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