The 1991 State and Local Fiscal Crisis

Fiscal Crisis EVERY DECADE or so the state and local government sector begins to behave strangely.Either the aggregate budget surplus gets very high, as it did on three occasions in the 1970s and 1980s, or very low, as it has recently.Although a low aggregate budget surplus is not the worst of national tragedies, it can be the harbinger of other problems and the cause of painful budget cuts and tax increases.And for those worried about low national saving rates, a low or falling state and local budget surplus is another nail in the coffin.There is no dearth of potential explanations for the recent drop in the surplus.State and local politicians themselves have been quick to blame forces beyond their control-the recession, changes in federal grant policies (which were the main explanations for earlier budgetary swings), or federal mandates that states pick up new costs under medicaid and other federal programs.By contrast, economists who have looked at the present situation conclude that states and localities have caused their own problems.Stephen Moore has emphasized the rapid growth in state spending, and Steven Gold has pointed to states' unwillingness to raise taxes.I One goal of this paper is to answer some of these factual questions-What has caused the drop in the surplus?What role was played by external factors and by states' and localities' own policies?How damaging is the drop?I try to answer these questions with some simulations from a I have benefited from the comments of Paul Courant, Steve Gold, Robert