This is the second installment of the Ohio Famer series. The form and voice of this post is to pay homage to a group of citizens who early in our country’s life engaged in passionate yet civil debates about the best form of government for our new country. They argued their case for the best form of government via letters to the local newspapers. These letters came to be known as the Anti- Federalist papers.

In my last letter, Ohio Farmer I, I discussed the inevitability of austerity measures at the local, state, and federal levels. In this letter I will document what I believe are the underpinnings of this crisis and how we might go back and embrace some of the concepts of our Anti-Federalists as way to move forward to sustainable government.

In the Anti-Federalist paper, Federal Farmer I, the author included a quote from Alexander Pope that underlines the pragmatic nature that even Anti-Federalist people viewed their government.

For Forms of Government let fools contest; whatever is best administered is best.

So although an Anti-Federalist like the Federal Farmer would naturally like to see limited federal powers, he also wanted to see a more effective government than the Articles of Confederation was allowing. The grand compromise was to create a federal government with limited powers and all other powers were to remain with the people. It took almost no time for Congress and the judicial system to start chipping away at the concept of limited Federal powers. Initially the efforts by Congress to expand their legislative power were hampered because they had to show to the courts that a restriction of liberty was reasonable.  Finally in the 1930s, the Supreme Court forever changed the concept of liberties residing with the people and began limiting when it was necessary for the government  to justify to a court its restrictions on the liberties of the people. In 1955 the Warren Court made the presumption of constitutionality of laws duly enacted by Congress effectively irrebuttable. Although Randy Barnett argues in his paper, Scrutiny Land, for an alternative approach that is more case specific, the present situation is that our liberties have been transferred to Congress to do as they see fit with almost no opportunity to contest the constitutionality of the law. The big problem with the transfer of liberties is the transfer of power that goes with it. With the transfer of power from the citizen to the federal branch complete, it is not surprising that we find ourselves in a financial mess. The balance of power has shifted to the federal branch. If there was an Anti-Federalist alive today, they would immediately recognize our failures at fiscal prudence with Social Security, Medicare, Medicaid, and our national debt as the same problems they saw with the British government. They would undoubtedly remind us that the need for the citizen to keep their liberties is to save Congress from itself. The issue of liberty is not so much about possessing freedom as it is about reducing the opportunities for bad government. All of our entitlement programs are duly enacted laws and complete failures at fiscal responsibility. With this type of power Congress is born to fail. The only question is when is it going to happen. A Congress with more restrictions and less power has less opportunities for major social achievements.  However if Congress plays by the rules, social achievements and good government are still a likely outcome and sustainable through recessions. That is a lot better than what we have right now.

As Eileen Norcross explains in her paper, Fiscal Evasion in State Budgeting, there is a wide range of “gimmicks” that loosely describes a range of
choices including school aid cuts, sales tax holidays, increased borrowing, delayed tax refunds, delayed payments to vendors, and pension deferrals. These same “gimmicks” are also used at city, county, and federal levels. Although she argues for more research we will undoubtedly need to stop using these “gimmicks” long before the research is completed. All of our governments have a desperate need for simplicity in financing so the executive branch and legislative branch can make good decisions.

As a path forward we should:

1. Start banning many of the budget “gimmicks” as part of our austerity programs.
2. Although it will be difficult for Congress to stomach, we need to set our entitlement programs apart from the political process. As an example Medicare should be reformed outside of health care reform and Medicaid. Social Security funds should not be an excuse to spend more money from our operating budget.
3. Legislators should be prevented from attaching earmarks to these entitlement programs financing.
4. Public service pension fund benefits should be voted on by referendum.

The form and voice of this post is to pay homage to a group of citizens who early in our country’s life engaged in passionate yet civil debates about the best form of government for our new country. They argued their case for the best form of government via letters to the local newspapers. These letters came to be known as the Anti- Federalist papers.

To the Editor of the Goshen Gazette,

Recently David Goldman at the Asia Times argued that banks would not allow a default by our city and state governments because of the impact of the defaults would have on the banks. In this article he said,

 

It’s not about the impact on the real economy (the attendant cut in public services and public employment), it’s about the effect that such defaults would have on the banks.

In fact, that’s a good rule of thumb. If it’s going to hurt the banks, it’s probably not going to be allowed to happen.

I agree with his point that the banks will  try to do everything in their power to avoid having a city or state to fail however I do not see that they have a choice in the matter. In this crisis the issue of whether to provide municipal financing is a relatively minor issue. Across the country the voters have largely rejected tax increase proposals. This leaves our legislators without a choice, spending cuts are inevitable. The only questions that remain unanswered are what programs do we cut and by how much. Resolving this issue will undoubtedly be very messy.

An interesting irony in this crisis is my belief that our elected legislators are particularly ill-suited for the job at hand. When I was a young man there seemed to be a multitude of legislators from both parties who not only campaigned for a more efficient government but applied the political pressure to make government actually work better. As the years went by and our legislators continued to drink heavily from the “deficit spending” Kool-Aid,  “deficit spending” went from a tool to stimulate an economy during a depression to a perpetual facet of our federal budget. Legislators from both parties paid lip service to balancing the budget but they made almost no effort to do anything about it. It was the next administration’s problem. Passing laws dependent on overly optimistic estimates of reduced spending became the norm and one of the many ways they could avoid voting on spending cuts. In fact almost all of the “spending cuts” over the last forty years have not actually cut spending but postponed the spending to later years. These legislators knew we would eventually have to pay for their lax budgeting practices but with a wink and a joke they hoped it would not occur during their term in office. We got away with these budget failures because we are the largest economy in the world and we were pretty effective competitor in the world market. However we might have reached our peak in the world market place and the willingness of foreign countries to finance our debt might have finally reached its limit. It looks like we have finally reached our budget doomsday and the best team we can put on the field is a group whose most redeeming quality is their inability and unwillingness to control spending.

The new twist to this crisis is that the budgeting illness that started at the federal level has mutated and infected our state and local governments. Three of our most important states, California, Illinois and New York, are for all practical purposes bankrupt. California paid their vendors in 2009 with IOUs. Despite the embarrassment of paying in IOUs the budget crisis is unresolved. Illinois has been paying their vendors late all year and the governor of New York vetoed 6900 bills to balance the budget. These states are not alone. There are 46 states with budget deficits. Not only do they share huge operating budget deficit problems but many states have a huge pension fund liability problem, too. To compound the budget deficit issue Medicaid costs are dominating the lion share of many state budgets. Without the 2009 stimulus money many states would have been forced to severely cut back Medicaid. Without additional federal money in 2011, many states will be forced to cut back on Medicaid. Some states have already decided that they have no choice but to cut back Medicaid. If the state tax revenue situation does not improve dramatically real soon, the state budget deficit issue will likely force at least one state into some form of “managed bankruptcy” within a year. This in turn might start a cascade of municipal failures. It could get pretty chaotic. Some legislators will work to manage the situation but it appears that many legislators would rather take their chances in bankruptcy then betray their constituencies. Although there might be some banks who have a good business reason to help the cities and states out, this is a life or death situation for politicians and constituencies. This situation may be too hot to handle for the banks.

It is my hope and prayers that we can find a group of legislators with the courage to put good government and budgeting over politics. Good government should always trump politics.

Here’s The Real Reason Cities And States Would Never Be Allowed To Default
Joe Weisenthal
Wed, 07 Jul 2010 17:49:48 GMT