Bluegrass Beacon: The dangers of state spending outpacing private economic growth
By JIM WATERS
Bluegrass Institute for Public Policy Solutions
Thursday, Feb. 16, 2012, 1 p.m. – No doubt you’ve heard about the frog feeling pretty comfortable in a tank of cold water but ending up boiling to death as the heat is gradually turned up.
JIM WATERS
There was no lid on top of the tank keeping the frog from jumping out. Yet he didn’t. He stayed in the tank and literally overheated.
Why? Because he didn’t realize the danger he was in – at least not until it was too late.
The story may not be biologically accurate, but it works metaphorically to describe the plight of Kentucky’s budget and its taxpayers.
We look at the slam-into-the-wall austerity measures occurring in Greece –and our state’s leading politicians scoff at such events ever happening here.
And they are right – at least partially. The seemingly sudden economic catastrophe happening in Greece likely will not happen here. In fact, what’s happening in our country and commonwealth could turn out to be far worse.
After all, if you turn those knobs suddenly and the water heats up quickly, that frog is going to take full advantage of a lid-less tank and jump – as high and as far away from that disastrous system as possible.
But the “knobs” on Kentucky’s debt are being turned up gradually enough that today’s politicians see no reason to address it. The water won’t boil until long after they begin collecting their taxpayer-funded pensions.
Economists predict that Kentucky will be one of the first states in the nation to reach a debt-to-GDP ratio of 90 percent – but not until 2025.
“A lot of people talk about Greece and Argentina and those types of debt crises … where you hit a wall and just go off the cliff,” said Matthew Mitchell, an economist at George Mason University’s Mercatus Center. “But there’s another way that a debt crisis can unfold … (where) you don’t hit a wall, you just settle into slow and grinding growth rates that basically wipe out a generation of economic growth.”
Gov. Beshear’s administration claims great success in cutting spending during the past few years. But that’s true – only if you look at the commonwealth’s General Fund.
“The General Fund is what state legislators like to talk about, but it’s not by any means all state spending; in fact, it’s not even a majority of state spending,” Mitchell said.
Considering other state and federal funds, Kentucky’s spending is up an inflation-adjusted 6 percent during the recession.
“So not only does it appear that Kentucky is nowhere near addressing its fiscal problem, it’s actually moving in the opposite direction,” Mitchell said.
This is due largely to hefty increases in spending for entitlement programs in recent years. For example, Medicaid spending has increased by nearly 300 percent since 1987.
Nationwide, state and local government spending is growing at twice the rate of private economic growth.
While this trend has been occurring during the past 60 years, the water is now more rapidly heating up.
Between 1980 and 2009, for every dollar that the private sector added to our economy, state and local governments added $1.20. Between 1990 and 2000, governments added $1.40 for every $1 grown by the private sector. And since 2000, governments have been growing at nearly twice the pace of the private sector, adding $1.90 for every $1 contributed by the private economy.
Like Mitchell said: We’re moving in the wrong direction.
“This is like a family whose income has increased fivefold but whose spending habits have increased tenfold – so that’s what we mean when we say it’s unsustainable,” he said. “You cannot constantly outpace the growth of the private sector on which you depend.”
At least not without boiling the frog to death.
— Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com. Read previously published columns at www.freedomkentucky.org/bluegrassbeacon.
-30-
