Why are states required to have balanced budgets?

With over $20 trillion in amassed debt, the United States federal government is no stranger to running budget deficits. It’s essentially common and expected practice now. For college students my age, the knowledge that there used to be a balanced budget in the US comes as a surprise that almost doesn’t seem real.

But for most state and local governments across the country, balanced budgets aren’t just the norm, but the rule. According to the National Conference of State Legislatures, 43 states require their governor to propose a balanced budget, 39 require the legislature to pass one, and 37 require the budget to continue to be balanced at the end of the fiscal year. In California, the constitution requires the governor to propose a balanced budget and prohibits the passage of a budget in which General Fund expenditures from exceeding General Fund revenues. In cases like California’s, it’s hard for states to even attempt to carry a deficit because their constitutions prevent them from selling bonds to pay for it.

California’s constitution was ratified in 1879. That’s 138 years (ideally) of balanced budgets. So why can’t the federal government do the same?

Spending only as much money as you get is definitely sound fiscal policy to ensure the solvency of the state government, but it does limit what legislatures can do in times of crisis. States and local governments are reliant on taxes on sales, income, and property — revenues that fall in economic recession when people lose their jobs, lose their property, and/or don’t buy as much. At the same time, reliance on safety net welfare programs increases, putting the state in a budget crunch.

Just as in the federal government, a great deal of state spending essentially runs on autopilot and is difficult to control. States take in — and then spend — a lot of money from federal grants or reimbursements, and the way that money is spent is typically determined by the federal government. Other revenues are specifically earmarked by law, such as money from lottery sales or gas taxes. And in other cases, like Proposition 98 in California, the state is required to spend a certain amount of money on specific departments. (Proposition 98 requires California to spend increasing amounts on education based on economic and enrollment growth).

A lack of flexibility can lead to desperate actions when the economy falters. Governments freeze hiring, stop maintaining buildings, cut back services, furlough employees, or renegotiate pension agreements. In 2009, Arizona was so desperate to balance its budget that it sold public buildings as a way to get money fast — including the Capitol, the state fairgrounds, and some prisons. These cuts can have further impacts on what we typically perceive as economic recovery, since state and local government spending makes up about 12 percent of GDP.

Whether this is good or bad depends in many ways on ideology. If state and local governments were allowed to follow the Keynesian model and spend their way out of an economic downturn, that would allow for even more powerful economic recovery efforts. But followers of Friedrich Hayek’s thinking would say that cutting state budgets in times of crisis keeps us rooted in the reality of the services our government gives us — and what they’re worth.

California’s housing crisis: What gives?

It’s no new news that California is experiencing a housing crisis. Just how bad the crisis is might surprise you.

The San Jose Mercury News published an in-depth investigation into the current crisis and finally answered the question: “What gives?” and most importantly “What’s next?”

Home ownership in California is at an all-time low since World War II. The average home price is 2.5 times higher than the average price nationally. With a median cost of around $437,000 more and more people are choosing to rent instead of buy.

While renting may seem like the better option it still takes a toll on residents as nearly 70 percent of poor Californians see most of their paychecks go to constantly rising rent. Couple the cost of rent with student loan debt and you have a crisis.

It can be said that while rent is infinitely more expensive in California than other places, residents are still getting paid more. This is indeed true, however, hidden within the truth is the fact that income has not kept pace with rising home costs.

This large income inequality has led many to move out of California, namely those living on the poverty line. From 2000-2015 800,000 residents have moved out of California to other states including Texas. The average income for the thousands that left in 2007 was $50,000.

Those who choose to tough it out and stay in California often become homeless. Between 2015 and 2016, California saw an uptick in homelessness of about 2,400 people. Housing data website, Zillow estimates that a 5% rent increase in Los Angeles would result in an additional 2,000 homeless people. So far rent has increased 4%.

The study found that such a crisis has large repercussions on the economy as a whole. The McKinsey Global Institute found such crisis cost the economy between $143 billion and $233 billion annually.

So how can California fix its problem before the bubble bursts? The state will once again tackle its long-awaited housing package again this month. While help may be on the way it won’t fix the problem entirely. According to the Legislative Analysts Office, helping the 1.7 million poorest residents would cost around $15 billion at the very least. The Los Angeles times estimates that of the three bills being considered only 25% of that estimation would be provided.