The Fiscal Future That Won’t Happen

Arithmetic always triumphs; our unsustainable trends will stop. What matters is how.
by | December 2012

"Unsustainable” is a word we hear frequently these days, and in a lot of different contexts. Surprisingly, it seems that in the context of government finance, the same smart people who tell us that the current trends are unsustainable seem also to be telling us that the kinds of things that need to happen to reverse those trends cannot happen.

We have a number of fiscal trends that are truly unsustainable -- ever-rising health-care costs, an overall federal budget in which 42 cents of every dollar is borrowed, the continuing deterioration of our infrastructure, trillions of dollars in unfunded public pension liabilities and more. Something has to happen to reverse these trends, but we are told that political paralysis will continue to prevent the kinds of changes that would bend the curve. The political climate is said to be too polarized to allow for meaningful solutions, and in fact, the solutions that are proposed are not of the required scale. Meaningful solutions would require compromise, stepping into the no-man’s land between the warring sides -- something we haven’t seen yet and are told we’ll never see.

That conventional wisdom is wrong. Why am I so sure? Because I believe in arithmetic. I have great confidence that two plus two is always going to equal four and that it will never be three or five. Eventually arithmetic triumphs over all. If these fiscal trends are mathematically unsustainable, and they are, then they will stop.

Of course, how they stop matters a great deal. We could have a disastrous debt-induced crash like one of those that Carmen Reinhart and Kenneth Rogoff document in their book, This Time Is Different: Eight Centuries of Financial Folly. Or we could adopt a set of painful sacrifices that would allow our governments to move toward balancing revenues and expenditures while making the large and badly needed investments that will let our economy continue to grow in the face of increasingly competitive globalization. It’s not a great choice, between the disastrous and the merely very bad, but that’s where the choices we’ve already made have left us.

Responsible state and local government officials and civic leaders have many options for how they respond to the fact that that which is unsustainable will not be sustained. They can work to persuade their congressional and legislative delegations to avoid that disastrous scenario and pursue the less painful alternative. And they can use the tools of deliberative democracy to engage their constituents. I often hear policy leaders despair of making the public understand the issues and their scale. They underestimate the wisdom of regular folks. There are lots of good arguments that their constituents are perfectly capable of understanding -- intergenerational fairness, patriotism, economic self-interest -- and they all should be used.

Now is the time for public leaders to begin scaling back risk and strengthening the financial position of their governments, because a new fiscal storm is bearing down. As the federal government struggles with its own fiscal unsustainability, Washington’s funding to the states certainly will continue to be reduced, and sharply. Likewise, state funding to local governments will be cut even more than it already has been.

Cities and counties, which already have undergone six straight years of revenue declines, are creatures of their state governments. They are at the bottom of the food chain, and their odds of being bailed out by their state capitals are slim. Local government leaders would do well to remember the famous New York Daily News headline from the days of New York City’s fiscal meltdown in the 1970s: “Ford to City: Drop Dead.” They also need to remember what former Milwaukee Mayor John Norquist said -- “You can’t build a city on pity” -- and plan accordingly.

Regardless of your ideological persuasion or policy preferences, the numbers tell you that there is a hurricane the size of Katrina on the radar. With luck, it won’t hit dead-on and the levees will hold, but it would be wise to begin gathering supplies and boarding up the windows.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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