The following is an excerpt from an article at RealClearPolicy by David T. Mitchell, Ph.D., director of the Arkansas Center for Research in Economics, and Dean Stansel, Ph.D., an economist at the O’Neil Center for Global Markets and Freedom at the Southern Methodist University’s Cox School of Business in Dallas.
COVID-19 is having an immense impact on state finances. Revenue collection is in free fall and spending is increasing as people make unemployment claims and switch from private insurance to Medicaid. And unlike the federal government, state governments do not have the option of rampantly running up their “credit cards” through budget deficits. They are required to balance their budgets.
That means tough choices are on the immediate horizon. In response, the National Governors’ Association (NGA) has called for $500 billion from the federal government. While NGA Vice Chair and New York Governor Andrew Cuomo’s state is in dire condition, not all states are doing so poorly.
One reason is that state policymakers long ago developed a tool to help deal with cyclical downturns in revenue. These budget stabilization funds are often referred to as “rainy day funds” (RDF’s) because they enable states to set aside money during good times to use when the next recession or other emergency hits.
Entering 2020, we were in a 10.5-year economic expansion, the longest one on record. Thus, we were due for a recession eventually. Many states managed their finances well during those expansionary years and built up sizable RDF balances rather than pursuing huge spending increases. Others did not.
We have been researching state fiscal crises for over a decade. Our findings indicate that states which increase spending faster during good times tend to end up paying for that extravagance later with worse fiscal crises during recessions.
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