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.