The deal on the federal budget between Congress and the White House clearly shows that neither branch of government is taking the budget deficit seriously enough. The best we can say about the deal is that it maintains status quo; a more realistic conclusion is that it will push the U.S. economy one big step closer to a debt crisis.
As frustrating as this is, it is also important to recognize that all is not lost. The good news of the day is that concern for the federal debt is no longer just an issue for fiscal conservatives. There is growing awareness of this issue among Democrats.
Unfortunately, President Obama is not one of them. Although he deserves kudos for having held back federal spending in his second term, his lack of interest in budget balancing is leaving a big challenge to his successor.
However, as far as the deficit issue goes, Obama seems to become more and more of an exception to a new Democratic mainstream. This mainstream is emerging at the federal level but appears to be even stronger in the state capitals.
One of the most interesting Congressional deficit-fighting initiatives actually comes from a Democrat. In 2013, Senator Joe Manchin (D-WV) and five other Democratic senators introduced the “common sense balanced budget amendment”. The main features are a requirement on the president to submit a balanced budget to Congress and requires Congress to keep the budget balanced throughout the fiscal year.
While not the ideal amendment type from a macroeconomic viewpoint, it shows that influential Congressional Democrats are willing to lead on this issue. That is welcome, in fact necessary, for the future. But there are also signs that Democrats are beginning to take the deficit problem serious at the state level.
While states cannot monetize deficits the same way the federal government can (they do not have their own central banks) it has been relatively easy historically for states to deal with deficits as they come and go. Wherever Democrats have been in majority they have typically “solved” the problem with higher taxes and more federal funds have typically eliminated budget gaps.
That is no longer going to be the case. In state after state governors and legislators are waking up to smell the coffee – and Democrats are increasingly taking the initiative.
Alaska is a good example. The Last Frontier state has been hit very hard by falling oil prices; with 90 percent of the General Fund being paid for with severance taxes the state is facing a big, permanent hole in its budget that no stopgap measure can fix. After a legislative session this year that was essentially paralyzed by the prospect of an end to the state’s oil boom, Governor Bill Walker, a Democrat elected in 2014, has taken charge. In a bold attempt to put the budget deficit issue right at the top of the state’s political agenda – and keep it there – he recently proposed a state income tax.
As one of seven states with no personal income tax, Alaska would not be well served by the governor’s proposal. Yet he summoned the political courage to propose the tax – and it takes political courage to do that in Alaska – because he wanted both legislators and Alaska taxpayers to pay attention to the state’s very troubled finances.
Oregon is another state where Democrats have begun a principled, and potentially very productive debate over the state’s problematic finances. They have good reasons to do so: Oregon has a state income tax that starts at five percent and caps out at 9.9 percent. Right across the Columbia River, the state of Washington offers a life without a state income tax.
To make matters worse, total state and local tax collections in the Beaver State have grown by 5.3 percent per year in the pat three years alone. During those years private sector income (business and private) has grown by about two percent per year. It is perhaps no surprise that there is a simmering tax revolt in the state.
Governor Mary Brown has realized this and engaged the business community in a conversation over the state’s future. On the one hand she is opposed to a union initiative to raise taxes on big corporations, knowing full well that Oregon does not have that many big corporations left to tax. On the other hand Governor Brown has taken a principled stand against cuts in welfare programs and education spending.
So far, Governor Brown has not come up with a long-term solution to the state’s budgetary situation. But she has provoked an intense debate within the state Democratic party, a debate that hopefully can lead to long-term solutions that do not send a debt bill down the road to coming generations.
If Democrats can do this at the state level, there is a good chance they can also do it at the federal level. Working together, fiscally conservative Republicans and fiscally responsible Democrats can save the prosperity of this country from a debt disaster that is no more than one recession away.
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Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Find his daily blog articles at America’s Fiscal Future.