by Richard Ravitch

Addressing local economies is key to solving the national mess

Until recently, the political system was preoccupied with a seemingly inevitable national healthcare reform and state Medicaid expansion. Now President Obama's effort to revive health reform is an uphill battle because the most visible subjects of discussion in Washington are unemployment and the federal deficit. But one thing hasn't changed: the huge disconnect between the problems faced by the states of the United States and the responses of federal policymakers.

The healthcare bills had many sound ideas but made a mistake in not focusing more closely on the fiscal effects of Medicaid expansion on the states. In the same way, the current discussion of unemployment and the federal deficit makes no mention of today's deep, widespread state budget crisis. Yet the issues of jobs and the federal deficit cannot be separated from the fiscal problems that the states now face.

The 50 states and their localities are the units of U.S. government that directly affect Americans' daily lives. The federal government has 2.5 million civilian employees, while states and localities employ some 15 million people. It is the states that bear primary responsibility for ensuring adequate infrastructure, education, and healthcare for their citizens. These conditions are the foundations of the national economy and its ability to provide jobs.

In 2010-11, states have faced and will face deficits of approximately $350 billion. These deficits will not disappear with the end of the recession. True, the recession caused large drops in state revenues, but these declines exposed years of structural state budget imbalances, with expenditures that frequently outpaced recurring revenues. Since states must generally balance their budgets, the gaps were often hidden by "one shots" like asset sales and borrowings.

Many people who focus on national politics see these state problems as failures of political morality. This view is neither useful nor accurate. Current state budget crises are not limited to states that are big or have arcane budgeting or colorful political histories. Crisis has also hit states with reputations for clean politics and sound fiscal practices.

The reasons for the widespread troubles are systemic. Some are on the revenue side: States increasingly rely on shrinking and volatile tax bases. Other reasons lie with expenditures: Much state spending is determined by changes in population size or need and, thus, tends to rise even--or especially--when state revenues fall. The biggest of these rising expenditures is Medicaid. Its costs from 1998 through 2008 rose four times as fast as the consumer price index.

The fact that Medicaid costs are eating up state budgets is not just a parochial state interest: It means that fewer resources are available for other state functions, especially education and infrastructure. These, despite federal contributions, have traditionally been and will continue to be primarily state and local tasks.

In the short run, the diminished resources for education and infrastructure create a drag on employment in the public and private sectors. Teachers are being laid off because of cuts in school aid. Unemployment is soaring in the building trades because there are no funds to build and maintain roads, bridges, mass transit, and other physical infrastructure.

In the longer run, the diminished resources will mean disinvestment in the factors that create and sustain economic growth. States are significantly cutting the higher education systems that have produced generations of the nation's human capital. In a recent hearing of the Senate Appropriations Committee, Sen. Lamar Alexander remarked that when he was governor of Tennessee, "my greatest problem was trying to get down to the end of the budget process, and it was usually a choice between expanding dollars for Medicaid or putting money into higher education. And that problem has gotten worse and worse and worse."

The American Society of Civil Engineers gave the country's infrastructure an overall grade of C in 1988 but now gives it a D. This disinvestment threatens not only safety but the capacity of American business to compete with the rest of the world. We are, as the farmers say, eating our seed corn.

Some people say that because of the federal deficit, Washington can't concern itself with state budget relief. But if policymakers try to address the federal deficit without recognizing the role states play in the national economy, they will achieve not federal fiscal integrity but governmental incapacities that ultimately impose increased federal costs.

The concurrent federal and state crises strongly suggest that it is once again time to give serious thought to adjusting and rationalizing our federal-state relations. We are undergoing extraordinary changes in the long-term economic prospects of the nation and many states, together with exponential growth in the cost to state and federal budgets of healthcare entitlements. It is time to think again about the distinctive competences of the federal and state governments, assign responsibilities to the governments best suited to carry them out, and pay for these functions out of revenues from the levels of government that are able to raise them in the most efficient and most equitable way.

These are not new concerns. As early as 1959, the federal government recognized the need for increased federal-state coordination and created the Advisory Commission on Governmental Relations, which for more than 30 years produced valuable information and brought together national experts to address federal-state problems. The enactment of revenue-sharing legislation in the 1970s reflected the political judgment that the federal government excels in collecting taxes while state and local governments have the skills needed to deliver services.

The states are not looking to the federal government to solve all of their deficit problems. They are making the most painful kinds of cuts in the services they provide to their citizens. But it would be both fair to state governments and prudent for the federal government to tackle unemployment and the federal deficit issues together with the issues of the contribution of the states to national economic health and the threat to this contribution from today's debilitating state budget deficits.

Richard Ravitch is the lieutenant governor of New York.

Available at Amazon.com:

The Next Hundred Million: America in 2050

To Fix Economy and Unemployment Rate, First Help States | Richard Ravitch