Hi. We're here with Carl Tannenbaum, Chief Economist of Northern Trust, to talk about the state of public finance. Carl, great to see you.
Good to be with you, although I wish we were discussing a more pleasant topic.
Well, there has been a glimmer of hope on the federal deficit side. Are we seeing the same bit of progress at the state and local level?
Unfortunately, no. While our federal deficit has continued to shrink as a percentage of our economy, the problem at the state and local level says continue to grow. What one think tank called a $3 trillion problem a few years ago is now a $4 trillion problem, and it seems to be getting worse and worse.
So what are the challenges facing local governments? They're really coming from both sides of the income statement. On the revenue side, public bodies rely very heavily on sales taxes and property taxes. Sales taxes have eroded because many people buy things on the internet, and property taxes have declined because the housing market hasn't been as generous as it was prior to the crisis. If you raise income taxes, then you tend to push residents and businesses to other states where taxes are low.
On the spending side, you have an aging population. And many states and localities have made pension and health promises to its public sector employees, and those pension gaps are frighteningly large in some places.
So what are the consequences of this fiscal stress at the local and state level?
There are local and also national consequences to this. The local consequences are that, if there's an uncertain fiscal situation, it's much less likely that people and firms will want to live in your area. But the real tragedy is that the inability of states to finance things that they're responsible for-- like economic infrastructure, like better education, the things that it will take to grow our economy over the next generation-- because state finances are in such poor shape, we're not doing as much of those things as we should. And that could carry over into the potential for the United States to enjoy good economic growth.
So what solutions are potentially available?
Unfortunately, there aren't many easy answers. I've been asked to get interest rates as high as possible as soon as possible as that would tend to ameliorate some of the pension problems that we have. But fundamentally, getting revenues and expenses closer together is going to take a lot of hard work by the politicians at state and local levels.
Thanks so much.