The New York Times starts with a simple premise today: With many states facing debt problems like Greece did—big budget deficits, some tricky accounting and complex derivatives to deal with those holes, and lots of retirees waiting to collect pensions—could Greek-style crises be far behind?
The headline seems to answer the question:
State Debt Woes Grow Too Big to Camouflage
But while the set-up is neat, the execution doesn’t quite deliver. Instead, this story leaves readers pushed and pulled, and tempted to conclude that states might be doing just fine after all.
The Times goes to a go-to expert on debt. But there are so many ifs, ands, and buts floating around, it’s hard to know what to make of the alarm he’s sounding:
“If we ran into a situation where one state got into trouble, they’d be bailed out six ways from Tuesday,” said Kenneth S. Rogoff, an economics professor at Harvard and a former research director of the International Monetary Fund. “But if we have a situation where there’s slow growth, and a bunch of cities and states are on the edge, like in Europe, we will have trouble.”
Much of what follows appears intended to support the states-can’t-cope premise, but this information also raises more questions than it answers. Like this:
The state’s economy will also be weighed down by the ballooning federal debt, though California does not have to worry about those payments as much as its taxpaying citizens and businesses do.
That connection just isn’t clear.
There’s also this, which also doesn’t quite explain itself:
Unstated debts pose a bigger problem to states with smaller economies. If Rhode Island were a country, the fair value of its pension debt would push it outside the maximum permitted by the euro zone, which tries to limit government debt to 60 percent of gross domestic product, according to Andrew Biggs, an economist with the American Enterprise Institute who has been analyzing state debt. Alaska would not qualify either.
But if we’re concerned about debt as a percent of GDP, why does it matter how big or small a state’s economy is? Similarly, the Times story contains a fascinating chart, showing the top 25 states in terms of debt as a share of GDP. It’s interesting to note that the states that appear to fare worst on that ranking—Alaska, Rhode Island, New Mexico, and Ohio—have received so little attention, and are barely mentioned in the story, while California, the poster-child for state budget woes, ranks as only 23rd worst. What’s up with that?
And for all that apparent weakness in state finances, the Times piece includes such a big and bulky on-the-other-hand section—six paragraphs, by my count—that it goes a long way to making the opposite case.
Here’s just a sampling (my emphasis):
State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade credit ratings, with California the lowest, and even California is still considered “average,” according to Moody’s Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the Great Depression.
Goldman Sachs, in a research report last week, acknowledged the pension issue but concluded the states were very unlikely to default on their debt and noted the states had 30 years to close pension shortfalls.
For once we agree with Business Insider, which is decidedly calm in the face of the Times story, pointing to a nice upward motion in the performance of the National Muni Bond ETF and declaring: “Everyone’s freaking out… except investors.”
When all is said and done, it sure seems like the more solid evidence in this story is in the states’ favor. If there is real reason to sound the alarm, a bit more reporting—and explaining—is in order.
Holly Yeager is CJR’s Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at holly.yeager@gmail.com.