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Illinois Proves Margaret Thatcher - You Really Can Run Out Of Other Peoples' Money

Forbes Online

Friday, June 30, 2017  |  Commentary  |  By Tim Worstall

Budget--State (8) , Comptroller (21) , Governor (44) , Lottery (61) Madigan, Michael--State House, 22
Of course, Margaret Thatcher said this was the problem with socialism but the state of Illinois is trying hard to prove that just normal general government can prove it to be true, you really can run out of other peoples’ money.

The specific problem here is a stand off between a Republican Governor and a generally Democratic legislature over how to get out of the problems they’ve currently got. But the more general background is simply that they’re spending, and promising to spend, more than the citizenry are willing to give them in tax revenue. It’s not quite that the money isn’t there, it’s that no one is really willing to give them that much to spend. Not all that an oddity, given how they have been spending the money:

The epic political showdown started after Rauner took office in 2015, vowing to cut taxes and reduce the influence of Illinois’s powerful public-sector labor unions. Most of the state government is still largely functioning through a series of court orders.

The state has accumulated nearly $15 billion in unpaid bills and state comptroller Susana Mendoza warned last week that cash reserves are so low that Illinois “will not be able to meet its core priorities, including schools,” by August.

With governments it’s always difficult to know whether $15 billion is a lot of money or not. Here it is. It’s about 50% of a year’s tax revenue for Illinois. Yep, if everyone paid 6 months’ taxes, the state spent nothing at all on anything else, then they’d only have covered what they already owe in bills. That’s a lot of money.

The gridlocked leaders have until midnight to reach an agreement to end an unprecedented impasse that’s left Illinois without a full-year budget since mid-2015. Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status.

It’s most unlikely that anyone would buy new junk rated debt either, meaning that they can’t go and borrow the money to pay those bills:

And in perhaps the most visible and immediate sign of the pressure on Illinois leaders to solve their budget standoff at long last, the multistate lotteries — Mega Millions and Powerball — are to be suspended.

Lotteries are, of course, immensely profitable for state governments. But people must also trust that you’ll actually hand over the cash into the general prize fund. That’s really pretty good going, handling the cash so badly that people won’t let you continue doing what makes a hefty profit.

Mendoza, the state comptroller, warned this week that without a budget, the state by August will have $185 million more in state-mandated and court-ordered payments than it will have revenue to pay them. She said that would make “the unthinkable” — such as delaying pension payments or not paying state workers — very likely.

No, really, they’ve run out of other peoples’ money.

And the current budget problems, which these are, aren’t even the worst of it. The capital side of the budget is worse. All those promises of good healthy pensions for state workers have meant that there’s a $130 billion or so deficit in funding those. That’s all the tax revenue the state gets for four years just to bring that up to speed.

The lesson here should be obvious but if not to recap. As Adam Smith pointed out there’s a lot of ruin in a nation. We can indeed spend beyond our means for years, decades even. We can promise very good pensions to our voters and not fund them properly at the time, hoping something will come up. We can decide that it would be just lovely to spend on this, or that other lovely thing. And it is indeed hard to get people to pay the taxes for everything nice that could be done. But in the end those bills do come due. It might take decades, as here and in Puerto Rico. We might be able to eviscerate an economy in only a decade, as with Venezuela, or in only a few years, as in Zimbabwe. But that reckoning will come in the end.

A balanced budget each and every year isn’t necessary, at the national level probably harmful. But as Thatcher said it’s possible to run out of other peoples’ money, as Illinois is finding out the hard way right now.