The Debt Tarnished City on the Hill

Don't look at Washington. Forget Wall Street. Detroit, who cares?

The story of America's real fiscal crisis, the one that will define what the US looks like a decade from now, is to be found in the nation's state houses. Yes, Washington is broke but it's not the federal government that delivers most of the core services on which societies and communities are built.

During America's Age of Darkness (Reagan, Bush I, Bush II), the feds paid scant attention to America's burgeoning national debt, its balance of trade deficits, its balance of payments deficits. But the states were hardly any better. They too gorged on cheap money even as artificially skyrocketing real estate prices and sales taxes from mega purchases their buyers couldn't really afford poured money into state coffers. It was the perfect setup for a recessionary collapse.

And it's not just the slave states that are in a terrible mess. California is struggling with multi-billion dollar deficits. Even the colonial states like Massachussets are in trouble. From the also troubled Boston Globe:

The problems are expected to be so widespread, the solutions so elusive, that the state may have to rethink the size of its commitment to big-ticket programs such as its landmark healthcare coverage plan, aid to cities and towns, and education funding, the specialists said at an emergency budget hearing convened yesterday by members of the state Senate.

Several economic specialists who testified advised state officials to prepare for at least four years of budget problems, foreshadowed by dire records: State revenues declined 35 percent this April over last year, the worst ever. The fall in state revenues for this year, projected to be $3 billion less than budgeted, will probably also be the steepest in state history.

"This is going to be the worst fiscal crisis in the state's history," said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation. "I think it's fair to say it's a catastrophe. That's not an overstatement."

Widmer projects that state tax collections will not return to 2008 levels until at least 2014, as state revenues lag behind a slowly rebuilding economy.

What's by no means certain is how the looming cutbacks in core services - health care and education - will impact the states in the decades to come. America is at a point where it needs more money for healthcare, more money for education, more money for social services yet will have to make do with less money and degraded or sharply curtailed services. These are the sort of programmes that directly impact the health of a society, that are the foundation for its strength. Societies that cannot provide these things are poorly positioned for the future, especially in the face of rapidly emerging rival economies.