The Associated Press has an important story today about the fairly horrifying condition of many state budgets. On its site, Politico has a rewrite of the AP story. That’s a good thing: the fiscal retrenchment that’s going to result from steep state deficits seems likely to be a big, bad deal for the economy over the next couple years, and it should command the attention of a wide array of media outlets.
Less good, unfortunately, is the lede of the Politico piece: “It’s not just the federal government - the states are broke, too.” That simple statement is simply inaccurate—and inaccurate in a way that fosters misunderstanding of the federal budget in particular.
The problem is the use of the word “broke,” which seems to be used here to mean something like “in an unfavorable fiscal situation.”
But the actual definition of the word is closer to “unable to meet your financial obligations.” Those are very different things, and under the second definition, even today’s strapped state government’s have not reached the point of being “broke.” As a 2010 The New York Times article noted, an American state has not defaulted on its debt since Arkansas did so during the Great Depression.
Still, many states are in a pretty perilous situation. The AP reports that they have cumulative unfunded pension liabilities that near $700 billion, and there’s been talk in some quarters about creating a bankruptcy mechanism that would allow state governments to shed those and other obligations. So while it’s technically incorrect to say any states are “broke” now, it’s at least possible to envision a scenario in which that term applies.
Not so for the federal government, as Bloomberg’s David Lynch showed in an excellent, comprehensive article in March, at a time when House Speaker John Boehner was trotting out the “we’re broke” line frequently. Here’s Lynch:
“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”
The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.
Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”
George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.
“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”
“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.
And in case all those finance-world types aren’t persuasive:
Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.
“To say your debts exceed your income is not ‘broke,’” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.
Got that? The U.S. government isn’t “broke,” and assuming Congress doesn’t do something foolish like refuse to raise the debt limit, it’s not going to be anytime soon.
So why does all this matter? For one thing, it’s journalism—accuracy always matters. And casually asserting that a government is “broke” when it isn’t can’t do much to improve the economic literacy of readers.
For another, as the Bloomberg story makes clear, there is a political motivation behind the “we’re broke” rhetoric, which is to force cutbacks in government spending. To bring this back around to where we started, one reason the state budget outlook is so grim is that federal aid provided under the stimulus bill has now been cut off, even as the economy hasn’t fully recovered. Because the federal government isn’t broke, it could, as a matter of economics, continue to provide that aid to the states. Federal policy-makers, though, are choosing not to do that.