No Runny Eggs

Indiana Governor Mitch Daniels (R) penned a warning call on the state of the states’ finances:

For now, my state’s situation is far better than most, but it won’t stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects.

And, unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines—if they ever do. Tax payments have fallen so far that it would require a rousing economic rally to restore them. This at a time when the Obama administration’s policies on taxes, spending and more seem designed to produce the opposite result. From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

That is in Indiana, which is weathering the storm relatively well. They still have over $1 billion in reserve, and they haven’t had to raise taxes yet. Further, they were able to get to that point from a state of near-bankruptcy 5 years ago by cutting per-capita spending by a 1.4% annual rate.

Gov. Daniels also has a warning for those who, like Wisconsin Gov. Jim Doyle (D) and the Democrat-run Legislature, treated Porkulus like a lifeline:

Unlike the federal government, states cannot deny reality by borrowing without limit. The Obama administration’s “stimulus” package in effect shared the use of Uncle Sam’s printing press for two years. But after that money runs out, the states will be back where they were.

I do quibble with the notion that the federal government can deny reality by borrowing without limit. We are already at the point where there is little appetite for the existing near-100%-of-GDP federal debt. If the refinancing of said debt, to say nothing about the well-above-economic-growth $1 trillion-plus per year additions to said debt that extend as far as the eye can see, can’t be absorbed by the bond market, then we will be talking about hyper-inflation. Unlike most of the recent examples of countries that have experienced debt-caused hyperinflation (which were bailed out by the US), there is nobody left to bail us out.