How the State Budget Deficits May Solve the National Debt Problem

Thursday, 27 January 2011 8:33 AM ET

By Ivory Johnson,
Scarborough Capital Management, Inc

The United States will pay more for the interest on its debt that it does on the military in six years, and unless deep spending cuts are implemented, the country may lose its AAA credit rating. The debt-reduction commission made several recommendations to reduce the growth of the national debt by 50 percent, and yet 60 percent of Americans oppose such changes. Fear of the abyss has been known to manifest solutions unavailable through compromise, and thank goodness for that. Washington may spend a lot of taxpayer money, but it’ll never waste a crisis.

The largest 15 states by size of their economy spent an average of 220 percent of their tax receipts over the last decade. Moreover, these deficits would have been worse if the states didn’t receive 20 percent of the $814 billion stimulus package that prevented mass layoffs. After all, state and local workers represent 15 percent of the labor force. It may, however, be a short reprieve, as most of the federal government subsidy programs run out in June of this year.

There’s a real possibility that several municipalities will need a bailout in 2011, increasing the cost that cash-strapped local governments incur to borrow money. The public pensions already have a $1 trillion shortfall and 31 states will have exhausted their pension funds in 15 years. Sounds hard to believe, but pension checks to retirees in Prichard Alabama have already stopped. Arizona has sold the capital building and refuses to pay for kidney and bone marrow transplants to Medicaid patients, citing the unreasonably high cost of saving lives.

This may appear unseemly, but consider the opportunity such events may offer. An estimated 65 percent of the national budget consists of the military spending, social security, Medicare and Medicaid, which no politician will ever cut when the overwhelming majority of voters oppose such drastic measures. On the other hand, the United States’ budget deficit is worse than Portugal’s, which will ultimately lead to hyper-inflation if Americans continue to demand a free lunch.

The only path to a balanced budget might be a public display of carnage on the state level once the stimulus money dries up. Nothing says “we’re flat broke” like slashed pensions and broken promises. The states would certainly shed workers, but 30 percent of the stimulus money has yet to be spent, perhaps anticipating government projects that would coincide with massive state budget deficits. Once voters recognize the severity of our unfunded liabilities, politicians might find the wherewithal to make politically difficult decisions under the cover of poll numbers.

The public has yet to respond to fact based warnings about reckless government spending; perhaps hardship will do the trick? Who knows what’s in store for the future; the states’ bleak financial predicament may prompt the public to demand austerity measures. Multinational corporations and working class folks alike, all dancing in the streets to the soulful sounds of Kumbaya, might finally agree to sacrifice for the good of the country – stranger things have happened. All demographics will suffer the consequences of irresponsible fiscal management, and so what? From what I’ve been told, freedom isn’t free.

Ivory Johnson is the director of financial planning at Scarborough Capital Management, Inc. He is a Certified Financial Planner, a Chartered Financial Consultant and a frequent guest on CNBC. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance.

© 2011