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Wednesday, January 11, 2012

States are not like the Federal Government

I think something that is often missed in the political debate of liberal versus conservative is that States are not the same as the federal government.  State-level liberals don't see this so they may sometimes see red if a more conservative Governor wants to reduce certain spending or maintain a balanced budget (many states are required to balance at least part of their budget but not all).  Federal-level conservatives, meanwhile, get upset when their more liberal colleagues don't see the deficit as the most pressing issue.   

States (and local government) are not the same as the federal government.  Both have some ability to borrow, though arguably the smaller the government institution the less able you are to borrow for riskier or longer projects (cities for example don't have the same ability as states which don't have the same power as the US government - at least not without having to pay a good amount of interest on debt).   Another constraint on State borrowing is of course politics.  Both can of course tax and spend.  But, the one thing (and it's a big thing) that State and local government can't (or at least don't) do that the feds can is print and control their own money supply  (not that states/cities don't try). When you control the purse strings, deficits are less of an issue.  It's an alternative to outright borrowing from some other sector.  It's also a practice that is largely still shadowy to the average citizen so it can be done without the same political obstacles.

Contrarily, for states that have limited ability to borrow (politically or otherwise), having a sound financial situation is often prudent since it is not like they can start adding instant dollars to their accounts like the feds can.  This is particularly true during times of economic downturn or economic risk combined with a federal government that is politically more motivated to reduce it's deficit (ie. not aid the states).  A risk averse state in this situation will have little choice but to tighten its purse strings, or else risk turning into an Illinois or California.  

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