Innovation’s Unexpected Return to States

The laboratories of democracy have reopened after the recession. But they’re not delivering the results that most experts have been conditioned to expect from them.
by | May 2013
 

As I was saying in my last Assessments column -- well, all right, that was more than three years ago, and I don’t expect you to remember every detail -- so here’s what I said: There are times when states seem to be at the center of innovation in American government, and times when they are so immersed in problems of all kinds that most of them seem barely able to keep afloat. There are also times when dysfunction in Washington appears to leave them as mere pawns in a chaotically imbalanced federal system.

A little history might serve to make things clearer.

When the first issue of this magazine was published in 1987, states were in good fiscal shape and more innovative than they had been in years. They were taking the lead in dealing with myriad domestic issues that Washington had failed to address.

Read the May issue of Governing magazine. 

President Ronald Reagan hadn’t devolved power to the states in the way he had promised to do, but the states didn’t seem particularly fazed by that. In 1988, journalist David Osborne came out with his widely publicized book “Laboratories of Democracy,” arguing that states had claimed the historic role as innovators that U.S. Supreme Court Justice Louis Brandeis had once marked out for them.

The era of self-confident state government actually lasted quite a while after that. Despite a pair of moderately severe recessions at the start of the 1990s and the 2000s, states remained the fulcrum of public policy experiment in America for the better part of two decades. While Washington found itself mired in what now seems like proto-gridlock, and did next to nothing across a whole range of policy areas from health care to energy, states were willing to tackle tough problems, or at least try. For example, governors from both parties and every region of the country were experimenting with novel economic development programs and coming up with new ideas for handling their welfare burden. Washington copied the states on welfare; it didn’t lead them.

Then came the Great Recession, and the modern era of state confidence seemed to come to an end virtually overnight.

When I wrote about the subject early in 2010, the outlook for states appeared to be bleaker than it had been in decades. Virtually every state government in the country faced fiscal insolvency. Their estimated shortfall was a combined $170 billion in that fiscal year, and $120 billion in the next. Some were up against budget holes equal to a quarter of their general fund; thousands of public workers were being laid off, and many thousands more were being furloughed.

Given that situation, I landed on the states rather hard. “The bottom line,” I wrote, “is that it may be unrealistic to consider states major innovators in public policy any time in this decade … the ‘laboratories of democracy’ will be closed, or at least inactive, for quite a while.” I now believe that prediction missed the mark, albeit in a rather peculiar way.

Whatever one may think about the actions that states have taken since the depths of the recession, one has to start by acknowledging that they are, for the most part, solvent. The majority of them have returned to a condition of fiscal stability more quickly than most observers were expecting three years ago. The way they have accomplished this hasn’t been pretty. Nevertheless, it has happened.

As states began their budget drafting a couple of months ago for the upcoming fiscal year, a majority faced only modest shortfalls that they could resolve without a great deal of stress or delay. Some lucky ones, such as Florida, Indiana and Iowa, have had the luxury of debating what to do with a significant surplus. Only a few remaining laggards, such as Nevada and Rhode Island, are heading into fiscal 2014 still battling the kind of painful decisions that have confronted them since the recession began.

Indeed, state revenues as a whole are nearly back to where they were in the pre-recession year of 2007. But those simple numbers mask a much larger truth: States simply aren’t making budgetary decisions the way they did five years ago. The gradually recovering revenues are being targeted to Medicaid, tax cuts, pension contributions, debt service and relatively few other categories. Social service agencies, public safety and some areas of education have been reduced to levels of state funding that make them qualitatively different enterprises from the ones they were in 2010.

California, as always, is a good choice to trot out as Exhibit A. Earlier this year, Gov. Jerry Brown announced with pride that after years of massive deficits, the state would actually project a modest surplus next year, thanks in large part to the tax increases approved by California voters in November. But the balanced budget was at least as much the product of sustained reductions in traditional state spending programs as it was of tax increases -- an impulse to cut that has been built into California budgeting ever since the recession started. Between 2008 and 2012, California reduced its overall state spending by 16 percent. By 2012, the state was at the lowest level of spending, as a share of the overall state economy, that it had seen since the early 1970s. Even so, Brown’s administration began 2012 by whacking another $1 billion from the state budget, mostly in money for schools, the disabled, public libraries and prisons.

One might assume that the sales and property tax increase approved at the polls might result in a substantial restoration of the cuts suffered by the hardest-hit spending categories over the past five years. But no sooner had Brown’s Proposition 30 won voter approval in November than the governor began proclaiming that there would be no spending binge aimed at using the added revenues to restore the fiscal priorities of the years prior to the recession. The losers of the austerity years would have to live with most of their losses in the years to come.

No other state deals in numbers as large as California’s, but most of them are in roughly the same position as they debate and approve their budgets for fiscal 2014. Schools will recoup some of the cutbacks of the 2008-2012 years. But most other components of the social service state will regain very little ground, if any at all.

It is a revolution that sometimes reveals itself only in very small pieces. But it’s a revolution nonetheless. Arizona is spending 10 percent less on classroom education than it did three years ago. South Carolina cut its mental health budget by 39 percent between 2009 and 2012. New Hampshire reduced its higher education budget by 36 percent over a comparable period. All those states are likely to increase spending amounts to some degree this year. But it would be foolishness to suppose that the bulk of the losses will be made good in the short or even the medium term.

We are seeing dramatic change in the scope and commitments of state government. We are seeing change that may well, in many cases, be permanent. But is it a matter of simple social service stinginess, or is it, in some meaningful sense, innovation?

It depends, of course, on how you choose to define “innovation.” If you are the breadwinner in a Kansas family who has grown accustomed to receiving a subsidy to help save for college tuition, you may not be inclined to regard its proposed elimination this year as an example of innovation. The education subsidy is a tiny piece of the sweeping social spending cuts that Kansas Gov. Sam Brownback and his legislative supporters have promoted as a way to pay for a plan that will gradually reduce the state income tax until, the governor hopes, the tax can be phased out completely. Brownback’s plan will cost the state billions of dollars over the next decade unless, as its supply-side supporters insist, the reduced rates generate so much economic growth that they will pay for themselves in a relatively few years. That remains a highly debatable proposition.

But if you are a Tea Party Republican, or even just a frustrated taxpayer convinced that high rates on income have hurt the middle class and driven away business opportunities, you are likely to see what Kansas has done as something much different -- a grand experiment.

The truth is that promoters of state innovation have tended to view it in a particular way: as a commitment of economic resources to such substantial categories as infrastructure, education and a variety of programs aimed at lifting poor people into the middle class. By that standard, state government since 2011 has been stuck in a stagnant time, one in which social stinginess has been driven not only by national recession but also by a conservative zeal to remake the welfare state into an ever-smaller part of life at the state level.

But there is no denying that the past few years have seen extraordinary events in state government -- massive reductions in the income tax; a rewriting of the labor compact between states and their public workers; a gradual redirection of education funds toward private or quasi-private institutions; an increased willingness of state political leaders to challenge or even repudiate policies handed down from Washington.

Personally, I do not agree with much of what has been done. But the states have been innovating. Some of them have been innovating like mad. The laboratories of democracy are open these days; they just have not been delivering the results that most students of public policy have been conditioned to expect from them.

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