A Little Example of “Crowding-In”

In the last budget, the New Hampshire state legislature cut state university funding by nearly half, as part of an effort to deal with a large budget gap opened up by unrealistic revenue forecasts issued by the previous legislature. Today, the NH Union-Leader reports an all-time best in fundraising success for the state university system:

Gifts and pledges in fiscal 2012, which ended June 30, were up more than 77 percent from last year, to a total of $22.5 million.

The goal was $20 million.

The total raised is second only to the final year of the last capital campaign in 2002, according to a release from the foundation.

The president of the university obliquely seems to acknowledge the role of budget cuts in the fundraising success:

“As we continue to plan for a comprehensive campaign, this represents a vote of confidence in UNH from more than 19,000 alumni and friends,” UNH President Mark W. Huddleston said.

Huddleston also is serving as the interim president of the UNH Foundation.

“Private support, especially in light of a historic cut in public funding from the New Hampshire Legislature, is crucial for student scholarship support and faculty development,” he said.

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Do Politicians Regulate When They Can’t Spend?

Noel Johnson, Matt Mitchell, and Steve Yamarik have a new working paper answering that question in the affirmative. They look at state fiscal and regulatory policies and find that Democrats generally like to increase taxes and spending when in control of state houses and Republicans do the reverse. But when states have tough balanced-budget requirements called “no-carry rules,” Democrats and Republicans don’t differ much on fiscal policy. Instead they try to appeal to their constituencies by pursuing regulatory policies – in general, Democrats increasing regulation and Republicans cutting it. As the paper’s still in the working draft stage, they are looking for comments on it.

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A rotten tax deal?

On the right there is growing resistance to the tax deal Republican leaders negotiated with President Obama. The deal trades another extension of the Bush tax cuts for something like $500 billion in new spending and a small cut to the payroll tax (it’s devilishly hard to find any concrete details on the plan online – can anyone out there help?). The new spending virtually represents a second stimulus. Much of it is an unemployment insurance extension, but apparently there is a ton of pork as well – ethanol subsidies, wind subsidies, etc.

The bottom line is that the deal blows up the deficit even further. When will Republicans realize that spending is the problem, not tax rates? Spending will have to be paid for in taxes sooner or later. If Republicans really believed their fiscal-conservative rhetoric, they would oppose any deal that increased government spending at all. Say it with me, Republicans: “every spending increase is a tax increase.”

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What Caused the State Budget Gaps? UPDATED

Clearly, the recession caused state revenues to fall short of projections, opening up budget deficits. However, some states dealt with more serious fiscal problems than others. California’s, New York’s, and Illinois’ woes have been in the news quite a bit lately.

A new paper by Matt Mitchell at the Mercatus Center finds that states with more less spending as a percentage of income, more growth in spending per capita in the two decades prior, less stringent balanced budget requirements, and less economic freedom have had bigger budget gaps. From the study:

Using Jason Sorens and William Ruger’s measure of economic freedom, I found that other factors being equal, the most-economically free states tended to have budget gaps that were 25 percentage points smaller than the least-free states.

One implication of this research, it seems to me, is that federal bailouts of highly indebted states encourage more spending and less economic freedom in the future.

(Disclosure: Work on the Ruger-Sorens Index of personal and economic freedom was funded by the Mercatus Center.)

UPDATE: corrected & clarified findings on government spending.

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Cutting Spending in a Recession

Like the UK, Germany is planning to “set an example” by virtually eliminating their deficit by 2014. Couple these efforts with those of Ireland, Greece, Spain, and Portugal, and the U.S. is really starting to look out of step.

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Krugman’s Hackery on Deficit Hawkery

Just about everything Paul Krugman writes nowadays is in some way related to rationalizing the Obama deficits. Now, Krugman’s a smarter man than I, but I think it’s pretty clear that his partisanship drives his economic analysis these days, rather than the other way around.

Yesterday Krugman turned a case against the euro into a mind-boggling attempt to justify Greece’s fiscal shenanigans over the past few years:

Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus.

So because the U.S. ran a budget deficit of about 5% of GDP when existing public debt was about 50% of GDP, that makes it OK for Greece to run a deficit of just under 5% of GDP when existing public debt was about 100% of GDP? As for Spain and Portugal, the rigidity of their labor markets contributes to unemployment – and in Spain the popping of an enormous housing bubble has intensified the effect. He continues:

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment.

Oh really? Tell that to economists who study the classical gold standard. From about 1880 to 1914, prices dropped on average 2% per year, even as the Second Industrial Revolution motored on. And here comes the inevitable payoff:

The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.

Because everything has to relate back to defending the U.S. government’s unconscionable fiscal excesses. If Krugman really thought monetary pump-priming is always necessary to get a local economy back on track, he would favor abolishing the dollar and breaking the U.S. up into optimal currency areas.

More to the point, Krugman’s (lack of) concern about budget deficits is strangely selective. Back in 2004, he castigated the Bush Administration for “enormous” budget deficits and “irresponsible” tax cuts. So much for the objectivity of the scholar.

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