To Fix the Economy and Unemployment Rate, First Help the States

Addressing local economies is key to solving the national mess.


 Richard Ravitch is the lieutenant governor of New York. 

Until recently, the political system was preoccupied with a seemingly inevitable national healthcare reform and state Medicaid expansion. Now President Obama's effort to revive health reform is an uphill battle because the most visible subjects of discussion in Washington are unemployment and the federal deficit. But one thing hasn't changed: the huge disconnect between the problems faced by the states of the United States and the responses of federal policymakers.

The healthcare bills had many sound ideas but made a mistake in not focusing more closely on the fiscal effects of Medicaid expansion on the states. In the same way, the current discussion of unemployment and the federal deficit makes no mention of today's deep, widespread state budget crisis. Yet the issues of jobs and the federal deficit cannot be separated from the fiscal problems that the states now face.

The 50 states and their localities are the units of U.S. government that directly affect Americans' daily lives. The federal government has 2.5 million civilian employees, while states and localities employ some 15 million people. It is the states that bear primary responsibility for ensuring adequate infrastructure, education, and healthcare for their citizens. These conditions are the foundations of the national economy and its ability to provide jobs.

In 2010–11, states have faced and will face deficits of approximately $350 billion. These deficits will not disappear with the end of the recession. True, the recession caused large drops in state revenues, but these declines exposed years of structural state budget imbalances, with expenditures that frequently outpaced recurring revenues. Since states must generally balance their budgets, the gaps were often hidden by "one shots" like asset sales and borrowings.

Many people who focus on national politics see these state problems as failures of political morality. This view is neither useful nor accurate. Current state budget crises are not limited to states that are big or have arcane budgeting or colorful political histories. Crisis has also hit states with reputations for clean politics and sound fiscal practices.

The reasons for the widespread troubles are systemic. Some are on the revenue side: States increasingly rely on shrinking and volatile tax bases. Other reasons lie with expenditures: Much state spending is determined by changes in population size or need and, thus, tends to rise even—or especially—when state revenues fall. The biggest of these rising expenditures is Medicaid. Its costs from 1998 through 2008 rose four times as fast as the consumer price index.

The fact that Medicaid costs are eating up state budgets is not just a parochial state interest: It means that fewer resources are available for other state functions, especially education and infrastructure. These, despite federal contributions, have traditionally been and will continue to be primarily state and local tasks.

In the short run, the diminished resources for education and infrastructure create a drag on employment in the public and private sectors. Teachers are being laid off because of cuts in school aid. Unemployment is soaring in the building trades because there are no funds to build and maintain roads, bridges, mass transit, and other physical infrastructure.

In the longer run, the diminished resources will mean disinvestment in the factors that create and sustain economic growth. States are significantly cutting the higher education systems that have produced generations of the nation's human capital. In a recent hearing of the Senate Appropriations Committee, Sen. Lamar Alexander remarked that when he was governor of Tennessee, "my greatest problem was trying to get down to the end of the budget process, and it was usually a choice between expanding dollars for Medicaid or putting money into higher education. And that problem has gotten worse and worse and worse."

The American Society of Civil Engineers gave the country's infrastructure an overall grade of C in 1988 but now gives it a D. This disinvestment threatens not only safety but the capacity of American business to compete with the rest of the world. We are, as the farmers say, eating our seed corn.