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.

One thought on “What Caused the State Budget Gaps? UPDATED

  1. It seems this is another of the many instances of government creating moral hazards. By subsidizing bad behavior, we get more of the same. It is hard for statists to argue that more tax and spend policies are the route to prosperity when all the states and cities following this program are economic basket cases. In the end, as these municipalities are ultimately forced to tighten their belts, the residents will be left with the high taxes and debt, and almost nothing in the way of the government largesse they had traded their freedom away for. Let’s just hope they don’t then move to a fiscally responsible state and call for more taxes and government services.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s