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YOUNG: One recession, two spending stories

States have controlled their spending while Washington hasn’t

- - Monday, February 10, 2014

Nothing more clearly demonstrates Washington's spending problem than the states' budget surpluses. Despite facing the same economic downturn, the two have weathered it far differently.

The reason is disarmingly simple: States have controlled their spending while Washington has not. Almost five years after the recession ended, Washington continues like it never ceased, while states have matched their budgets to their revenues.

On Jan. 27, The Wall Street Journal reported on the National Association of State Budget Officers' latest report on general-fund spending (the largest portion of state outlays) and determined: "Growing revenue and mounting surpluses have states putting the recession behind them."

While true, the reason "growing revenue" is now producing "mounting surpluses" is because states strictly controlled their spending.

The contrast with Washington's performance could not be starker.

In 2008, the year before the recession fully hit, state general fund spending grew 4.9 percent. When the recession hit in 2009, spending fell 3.8 percent and an additional 5.7 percent in 2010.

Since then, it has grown 3.8 percent in 2011, 3.4 percent in 2012, and 4.3 percent in 2013 — with a further 3.8 percent increase projected this year.

The budget officers' report shows, as in all recessions, state coffers matched the downturn. Revenue did not surpass 2008 levels until last year, and only increased 5.7 percent then, following just a 0.8 percent increase in 2012.

Yet despite less than robust growth, "states have enacted net tax cuts in two of the last three fiscal years and revenue collections have outpaced projections."

Washington's result were almost the exactly opposite.

In 2008, federal spending jumped 9.3 percent. In 2009, when the economy contracted, it spiked 17.9 percent. In 2010, it dropped a scant 1.7 percent.

It then increased 4.2 percent in 2011, before falling slightly again — 1.8 percent in 2012 and 2.4 percent in 2013. The Congressional Budget Office projects it will grow 4.3 percent this year.

As in the states, federal revenue fell with the faltering economy. In 2008, it dropped 1.7 percent and 16.6 percent in 2009. Then it began to grow — 2.7 percent in 2010, 6.5 percent in 2011, and 6.3 percent in 2012.

While states enacted tax cuts, Washington implemented a large tax hike last year — spiking revenue by 13.3 percent. However, even with the rebound and legislated increase, revenue has yet to overtake federal outlays.

The difference between state and federal spending is easily summed up: State spending did not surpass 2008's pre-recession level until 2013; federal spending has never fallen below its 2008 level — and federal revenue has yet to even match 2008's spending level.

Federal spending has exceeded its 2008 level by at least 15.8 percent in each subsequent year — only coming within $500 billion of it twice — exceeding it on average by 18.3 percent. In comparison, federal revenue exceeded its 2008 level by 10 percent last year.

Many liberals oppose the states' approach of reducing spending in the face of an economic downturn — favoring the federal one — and take the Keynesian stance that government spending should be countercyclical to the economy.

However, for sake of argument, even accepting this approach, the fact remains: Federal spending has yet to fall.

The approaching five-year anniversary of the recession's conclusion would seem to argue for federal spending's retrenchment. Although the Federal Reserve has begun to taper its quantitative-easing program, the federal government has yet to seriously ease its spending program.

While sharing the same economy, America consists of different fiscal worlds. In states, spending falls with revenues. In Washington, spending hardly ever falls — regardless of where revenue goes.

The result is what we currently see: Washington congratulating itself for last year having achieved a $680 billion deficit that amounted to 4.1 percent of gross domestic product.

Had it not been for the previous four years' deficits, last year's as a percentage of GDP would have been the highest since 1992.

Entitlements, those autopilot spending programs, assuredly drive federal spending. However, Washington's problem runs deeper than its spending mechanics.

It is rooted in its culture of spending. As the Congressional Budget Office points out, the federal deficit has averaged 3 percent of the nation's economic production over the past 40 years.

While states are running surpluses and debating how to use their reinvigorated revenues, Washington continues to rack up high deficits by historical standards — despite higher revenue.

Those deficits resulted from federal spending surging at the recession's beginning and then effectively never receding — now almost five years after the recession.

These deficits are the product of a culture of tolerance for overspending that stretches back decades. In contrast, the states neither share Washington's culture of overspending nor the illusion that it is sustainable or desirable. They now have the surpluses to show for it.

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.