How Much Debt Is Too Much for Voters?

How Much Debt Is Too Much for Voters?
By Steven Malanga

Recently two different polling firms separately asked voters in California and New York how their state governments should solve their current budget problems: through tax increases, spending cuts, or a combination of both. Neither poll gave voters another choice: more debt.

That's a serious omission considering how governments in America routinely deal with fiscal shortfalls. Shortly after the New York poll, for instance, the state's lieutenant governor, Richard Ravitch, proposed borrowing $2 billion to plug Albany's fiscal hole. Although such borrowing to cover operating expenses was once considered fiscal folly, even the ratings agencies merely yawned at the suggestion.

Other governments have been borrowing just as liberally to balance budgets (if you can even call that balancing), but in other ways. New Jersey and Illinois are among the states that either skipped payments into their pension systems last year or borrowed money to fund the system, which is sort of like taking out a cash advance on your credit card to make a deposit into your IRA. Since benefits guaranteed to employees are another form of debt, omitting payments or borrowing to make them increases indebtedness, which is no small matter in both cases. Illinois already has the highest percentage of unfunded pension liabilities of any state, while a recent analysis by the Citizens Budget Commission of states' debts compared to their economic resources rates Jersey as being in the worst financial shape in the country. What's a bit more borrowing when you are already a fiscal wreck?

Politicians go ahead with these schemes because they believe that when push comes to shove voters will prefer more debt to tax hikes or significant spending cuts. Ravitch responded to criticism of his plan with claims that any strategy to close the state's budget gap with spending cuts was "totally disconnected from reality" because voters weren't prepared to accept deep cuts. Obviously, by implication he thinks voters are prepared to accept more debt, even though New York is already $120 billion in hock and is one of six states the CBC report listed as in a debt "danger zone."

There's good reason for politicians to believe that debt really doesn't matter that much to voters. After all, even many economists seem sanguine about the exploding national deficit, which must be financed with debt. Recently, when Michael Kinsley, who hardly qualifies as a deficit hawk, penned a piece in the Atlantic about his growing fears that the deficit will lead to hyper-inflation, he took it on the chin from the likes of Paul Krugman.

But Kinsley was unimpressed with the explanations proffered by Krugman and others for why he shouldn't worry about the deficit. If the level of national debt is so inconsequential to our future, Kinsley wrote, "Why do we ever bother to show fiscal restraint? Why have taxes at all?..If $15 trillion in debt can be a freebie, why not $30 trillion or $60 trillion?" Good questions.

But the real puzzle is how many voters think exactly the way some economists think? Maybe government debt matters only enough so that voters expect politicians to pretend to be concerned about it, as the President recently did when he said the deficit "will saddle every child in America with an intolerable burden." But it doesn't really matter enough for the President to do something about it, clearly.

Once, we must have cared more. Many state constitutions, for instance, were written to require that politicians go to voters to get approval to issue debt. Over the years voters turned down enough debt issues so that pols, enabled by municipal finance experts at the big Wall Street firms, found ways around the borrowing limits. Among other things, they created independent borrowing authorities whose debt is not technically backed by taxpayers, but by appropriations from the legislature (as if legislatures have some significant source of revenues other than taxes). State courts went along with this detour around voters in places where judges seem to think that constitutions are like balloons that can be pumped up to fit any design, and it's worked well because voters who angrily turn down new debt obligations seem undisturbed by billions of dollars of debt issued without their approval. New York State, for instance, has just $3 billion in debt that had to be approved by voters, but about $60 billion in total bonded debt. If voters cared, or understood, 98 percent of New York's legislators wouldn't routinely get re-elected, as they do.

In fairness to voters, governments have also gotten good about hiding their true levels of debt with all sorts of maneuvers that are worthy of those three-card Monte experts who operate on street corners. States and cities borrow money and then stuff it into their pension funds to make them look better funded, then invest the borrowed money in the stock market and project unrealistically high returns that make it seem as if the debt can be paid back from investment gains alone. Buyers of bonds go along with these schemes because they figure that states and municipalities fall into the category of too big or too important to fail, though that idea will be sorely tested if we get widespread defaults that undermine the whole market.

When you account for all of the shenanigans that governments pull with their debt, including pension accounting which a private company could never get away with without someone going to jail, the real liabilities of state and local governments are probably twice as high as what public actuaries say they are. Would it matter to voters if they knew the real number? Or is any debt larger than a $1 trillion just too hard for voters to comprehend anyway?

Recently, after California floated a bond offering against the advice of its Treasurer, Sacramento Bee columnist Dan Walters tried to estimate the state's debt from all sources. The number he came up with was $600 billion. Sure, California is our biggest state, but $600 billion! How does anyone in the state legislature still have his job?

In the end, this is what politicians must rely on, that our debt at all levels of government has just gotten so high than another billion here or there doesn't seem like real money anymore. And if the housing crisis is any indication, there may only be one way of curing Americans from ever-increasing borrowing of one sort or another, and that's with a loud bang. I just can't imagine how much noise the government debt bubble will make when it explodes.