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DONATELLI: States don’t need more stimulus

Fiscally conservative policies show better results than government spending

- - Tuesday, June 19, 2012

The president has given a long list of excuses for the shape of America's struggling economy. He has cited high energy costs, the debt crisis in Europe and, of course, George W. Bush and the evil House Republicans for not passing his agenda. Following his recent gaffe, in which he said, "the private sector is doing fine," President Obama then made the argument that the public sector is struggling because states don't have the resources to make "investments" in needed public services. Like the others, this explanation rings hollow.

If the problem was state spending, the Obama stimulus in 2009 should have solved it, but today America still suffers from 8.2 percent unemployment and 1.9 percent growth in the first quarter of 2012.

One reason why the $831 billion stimulus plan received virtually no Republican support was that it was heavily weighted toward subsidizing the public sector, specifically, preserving jobs for members of public-employee unions. At a time when the private sector was shrinking by roughly 8 million jobs, public-sector employment remained constant. Such a policy offers some short-term economic stimulation but little real benefit since no long-term, private-sector jobs are created - as we have now seen.

Today, the states that are doing well are not taking the president's advice. They are not fattening up the public sector and creating more bureaucracy as he would want. Rather, they're doing the very opposite - rationing state government and creating a more business-friendly environment for the private sector to create jobs and economic growth.

Let's start with Wisconsin. Most now know Republican Gov. Scott Walker defeated a union-led recall vote. When he took office in January of 2011, Mr. Walker inherited a stagnant economy and a $3.6 billion budget deficit. He attacked the problem head-on. His centerpiece reform was to utilize the state workforce more efficiently, not ask the federal government for more stimulus funds. For example, the governor required modestly higher pension and health care contributions from state workers, but he also eliminated burdensome work rules that prevented state and local agencies from utilizing workers, including teachers, in the most effective way possible. His state's budget is now balanced, the economy is growing again, and Wisconsin's unemployment rate in May of 6.8 percent is 1.4 points below the national average.

Contrast that with Illinois, Wisconsin's neighbor to the south. Democratic Gov. Pat Quinn took Mr. Obama's advice. In January 2011, the governor raised Illinois' flat-rate income tax from 3 percent to 5 percent for four years, in addition to raising the state's corporate tax from 4.8 percent to 7 percent for four years. At the same time, Mr. Quinn instituted no major reforms in state spending. Now, just 18 months later, the state is grappling with a deficit that approaches $11 billion. Worse, growth has slowed and unemployment is now 8.6 percent, compared to 8 percent when he took office in January 2009. Unable to pay for the state's $15 billion Medicaid program, Mr. Quinn and the Democratic Illinois legislature in May passed $1.6 billion in Medicaid cuts. At the same time, the governor's efforts to reform state pensions failed, but will resume this summer. Unlike Wisconsin, Illinois has just postponed the day of reckoning when it will finally have to address its fiscal imbalance.

Also consider Maryland and Virginia. Both states bordering the nation's capital benefit from the enormous federal spending of the Obama years. That's where the similarity ends. Maryland's Democratic Gov. Martin O'Malley succeeded in raising state income taxes yet again this year. His plan to increase the gas tax and the state sales tax proved too much even for his overwhelmingly Democratic legislature. He "cut" state spending by dumping teacher pension obligations onto county governments, all the while resisting any reforms in the overall plan structure. Here's one governor who accepts the president's view of more spending. He's rumored to be running for president, and with this performance, would be an appropriate successor to Mr. Obama.

Virginia is led by conservative Republican Gov. Bob McDonnell. In his three years in office, he eliminated a billion-dollar deficit left over from liberal Gov. Tim Kaine by cutting spending and reforming the bureaucracy, not by raising taxes or stimulating spending. It's no surprise that Virginia leads Maryland in job creation, employment growth and is by far the more favored jurisdiction for new companies seeking expansion in the D.C. area.

California has followed Mr. Obama's advice to the letter. Gov. Jerry Brown has proposed hiking the state income tax on top earners to an unbelievable 11.3 percent. He would also increase the state sales tax for all residents. This is despite the continued exodus from his state of firms and high-income individuals to neighboring jurisdictions. Public-employee unions and liberal interest groups continue to run Sacramento as the state struggles to close yet another deficit that approaches $16 billion this time. California's unemployment rate is 10.8 percent, one of the highest in the country. This is a state that boasts natural resources, diverse farming interests, a tourism industry that is one of the country's best, not to mention Hollywood and Silicon Valley. Yet, none of this can overcome its political leaders' terrible fiscal policies.

Texas, by contrast, is known for its tight-fisted conservatism: no state income tax, a low unemployment rate of 6.9 percent, and strong economic growth - even during the Great Recession. The Lone Star State continues to lead the country by a wide margin in job creation and businesses moving into the state.

Despite all of this evidence, the president continues to insist that government-directed spending can create wealth and prosperity in the states and across the country. It does not. How else can you explain failures like Solyndra, high-speed trains, and the $831 billion stimulus? Why on earth would we believe that big spending at the state level could produce better results?

States that have chosen to ignore Mr. Obama's advice have performed far better than those who followed it. It turns out the reason states are "doing just fine" is because they follow a model opposite that of Mr. Obama's belief in higher taxes and increased stimulus spending. That's why the number of dark blue states might very well shrink after November's elections.

Frank Donatelli is chairman of GOPAC.