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The 1991 State and Local Fiscal Crisis

Abstract

EVERY DECADE or so the state and local government sector begins to
behave strangely. Either the aggregate budget surplus gets very high, as
it did on three occasions in the 1970s and 1980s, or very low, as it has
recently. Although a low aggregate budget surplus is not the worst of
national tragedies, it can be the harbinger of other problems and the
cause of painful budget cuts and tax increases. And for those worried
about low national saving rates, a low or falling state and local budget
surplus is another nail in the coffin.
There is no dearth of potential explanations for the recent drop in the
surplus. State and local politicians themselves have been quick to blame
forces beyond their control-the recession, changes in federal grant
policies (which were the main explanations for earlier budgetary
swings), or federal mandates that states pick up new costs under medicaid
and other federal programs. By contrast, economists who have
looked at the present situation conclude that states and localities have
caused their own problems. Stephen Moore has emphasized the rapid
growth in state spending, and Steven Gold has pointed to states' unwillingness
to raise taxes.

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