Saturday, May 23, 2009

How to prevent state and federal budget meltdowns.

New Jersey's municipal bonds face a severe crisis.

They are unlikely to be the last ones.

The fact that most of our state governments and our federal government are completely unable to manage a budget without personal political considerations outweighing what's best for the state and country probably indicates that there's something structurally wrong with how we make our fiscal decisions.

One South American country (Chile?) has a fiscal czar. That could work, but it opens the possibility of corruption.

I've mentioned this before, but I prefer a system where America, and each of its states, have to have balanced budgets or surpluses over every 10 (12, 15, whatever) year period. If there is a crisis, as there is now, deficits can be run, as they should be. However, there is a strong political incentive for new policies to last forever, so budget deficits grow forever. This would reverse that.

In fact, if you wanted to create a little more flexibility, you could say that the country needs to have a balanced budget over the last 8 years, 10 years or 12 years at any given time. If 2 of those are out of budget, but one of them is inline, it allows for freak crises (2 recessions in one ten year period), and it actually does allow debt to grow, but hopefully it'll be much slower - debt growth that is slower than inflation is actually a debt shrinkage in real terms.

You can do that with states, as well. It'd be tougher, because so much of state budgets are funded by the federal government, but there needs to be some sort of fiscal accountability. The current system is crap.

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