On this week's episode of the Campbell Conversations, Grant Reeher speaks with David Schleicher. He's a professor at Yale Law School and an expert on state and local governments and their financing, land use and urban development. He's the author of, "In a Bad State: Responding to State and Local Budget Crises".
Program transcript:
Grant Reeher: Welcome to the Campbell Conversations led Grant Reeher. My guest today is David Schleicher. He's a professor at Yale Law School and an expert on state and local governments and their financing, land use and urban development. He's also the author of a new book titled, “In a Bad State: Responding to State and Local Budget Crises”. Professor Schleicher, welcome to the program.
David Schleicher: Thanks so much for having me, I'm excited.
GR: Well, it's good to have you. So, let me just start with a really basic kind of historical perspective question, because you do talk in your book about different moments in time for state and local governments and their financing. So, can you just provide a very brief thumbnail history of state and local finances and recent decades?
DS: In recent decades, so I'm going to go back a little bit. Basically, American history throughout, from the first Congress to today has had lots and lots of situations in which state and local governments have gotten over their skis. And so it was something that first Congress dealt with, it was something the last Congress dealt with. And the basic problem is we have lots of states and state finance is what people call pro-cyclical because they can't print money and because they, after the 1840’s and then after the 1870’s, both those periods are kind of (unintelligible) have balanced budget rules. They, when they get more money they spend more money, when they have less money, they spend less money. And this kind of structurally leads to crisis. And so we have over the course of American history at different moments, from the Hamilton's assumption of state debts through the New York City fiscal crisis in the 1970’s, through COVID, a series of moments when state and local governments get into fiscal crisis.
GR: Okay, and so this is something that has been consistent over the years. But is there, do you think there's something fundamentally different, structurally, about the challenges that state and local governments are facing now financially, or is this just a new version of the same story?
DS: It's mostly a new version of this. I mean, there are some kind of notable differences. I mean, it's always different, right? So history rhymes, but it doesn't repeat. And so the period after the Great Recession was a big period of state and local government pull back. One of the reasons the Great Recession was so long was that state and local governments had faced this huge financing crisis and then cut everything in order to make their, kind of to be able to survive. And some places didn't of course. You have Detroit and Puerto Rico, which had to default. One of the things they did in order to do that was that they didn't save for their pensions. So one of the things you can do in order to avoid a fiscal crisis is borrow. And not saving it for your pensions is a form of borrowing. One of the things we saw in the post 2008 period, which should have been, in theory, a great period for infrastructure development because interest rates were low and unemployment was high. And you should be able to hire a bunch of guys to build bridges or whatever. And we saw instead, because governments were in a period of fiscal pullback, what they did was they borrowed by not saving for their pensions. And that's debt too, for all intents and purposes, but it's not attached to a road or a bridge or anything. And so if you think, look at what are the great infrastructural marvels of the 2010’s, they don't exist for the most part, and that's because of this dynamic. And so coming into the COVID period, things have started to get better that we'd had a number of years of economic expansion with that, a number of periods of steep fiscal expansion and then the period of COVID, like, everyone got really nervous about fiscal crisis, the federal government dumps, I think what can only be described as a boatload of money on states and cities. And right now states and cities are in a lot of ways in the last budget cycle, the best period they've been in in a very, very long time. But it's starting to change that. You're starting to see in New York revenues are coming in way lower than anticipated. You're starting to see structural deficits going into where at this moment of inflection, where things have been great for a while. If you just came politically of age, it's neither of us, but, you know, just came politically of age recently, state government is something that, things are always getting better. They're cutting taxes, they're spending more money, they're doing more stuff. Last, say, half decade to a decade. But that's about to change. We're about to enter in a renewed period of fiscal retrenchment in which there's going to be cuts. There's still the huge legacy pension debt problem that arose from the post 2008 period. And we're going to see a period of some substantial pain and maybe some crises alongside it.
GR: Yeah, I want to come back to the New York case a little bit later, but you've kind of already spoken to this but I did want to put this question to you anyway, kind of as a follow up to that. There seems to me there has been and I'm thinking of recent decades and you've just told the story of this, this pattern where we read and we hear at various moments that states are in a crisis on their budgets. I thought of the aftermath of the financial crisis of 2008. You mentioned that with the Great Recession, I thought of COVID. And then either one of two things seems to happen. The economy rebounds or, and maybe both, the federal government provides a large influx of cash. You described it as a boatload for COVID, and then the crisis seems to subside, people stop talking about it. So is this just kind of the pattern, do you think, that's going to keep going in one way or another?
DS: So it could be on two things. One is that when the federal government does provide money, it creates incentives for the next crisis. That if the federal government provides money, we call this the problem of moral hazard. Some of your listeners may recall that a lot of discussion of moral hazard about banks in the post 2008 period. But the same type of idea which is that if either governments, or really because their lenders believe the federal government is going to come in with a lot of money, then there's a little less pressure to engage in fiscal rectitude going forward. And so we may be pushing this cycle down the road and creating more and more crises going forward. The other thing is that no, I mean, most state and local governments aren't in crisis most of the time. It is not the case that we are always in crisis. The one thing that made the post 2008 period really notable is something that the late, great Dick Ravitch used to say is that we're eating our seed corn. And he was lieutenant governor of New York at the time during this period, and he noted that the budgets were doing a lot of things that were keeping the state solvent. And this is not just true about New York, but were using one time revenues or were taking advantage of the large infrastructure that was developed over a long period of time and not maintaining it. We're not adding to it. And so while we've managed to mostly avoid new crises, we've done so at some really substantial cost because the budget didn't get structurally balanced.
GR: Right. You're listening to the Campbell Conversations on WRVO Public Media. I'm Grant Reeher, and I'm speaking with David Schleicher. He's a professor at Yale Law School and the author of a new book titled, “In a Bad State: Responding to State and Local Budget Crises”. So you've already talked about this, but one obvious solution when these problems come up is for the federal government to take on an even larger role financially and policy wise, arguably at the expense of the states. Because as you mentioned, the federal government comes in and makes an injection of cash, but also attaches certain strings to that, provide certain incentives in doing that. One of the things that occurs to me as a sort of a political or a cultural problem for that is that we know from surveys over recent decades that, well, actually it goes back 40, 50 years that state and local governments are the governments that citizens trust more than the national government. And they like these governments. And again that trend goes back to the 1980’s. So is that pattern problematic as a solution? That the part of government that is least trusted comes in and then takes over more control in these moments?
DS: So again, I mean I think there are real downsides to providing too much aid but I wouldn't put too much stock in those surveys that say that people like state and local government the best. One thing we've seen in recent years is that voters know increasingly a little about state and local government. That, in fact if you look at voting patterns, the correlation between people's state legislative voting patterns and their vote for president is now upwards of 95%. It's extremely, extremely tight. And no one thinks that people are, that their beliefs about the New York State Assembly are influencing whether they like Joe Biden or Donald Trump. It's all going the other way. And so it's increasingly not clear that anything that happens in the state legislatures matters to how people vote for state legislature. And so people like state government on some theoretical level and local government, even particularly. State government, there's actually a little bit of mixed evidence, but they don't behave like they like it very frequently. And so the centralization that federal aid is generally associated with is a, one thing is kind of a product of these policy choices, but it's also a product of where people's attention is. And so one of the things I've written, and you can see this in kind of in the late parts of the book, is that people who care about federalism should care about state and local governments, should focus a little less on kind of federal state relations in the way that they traditionally have and a little more on making state democracy work better. Because if the reason you care about federalism is you want different people to choose different things so that the people of Syracuse and people of New York City or the people of New York State and the people of Texas can choose different things representing that they're different people. But increasingly, our federalism looks like a red choice and a blue choice. And that isn't like super, super, super attractive.
GR: So there are two things going on there, I think, and one we've talked about a lot on this program in recent years is political polarization, which is driving that linking of the national and the local voting patterns and again, people's understanding of it. But the other thing, and I wondered if you have looked at this, is the connection between the collapse of media coverage of state and local politics and people's knowledge about state and local politics.
DS: So Daniel Hopkins, wrote a wonderful book called, “The Increasingly United States” which tracks this phenomenon, puts a lot of the story on decline in state and local media. And there's a lot of evidence for this. So, when a local paper closes, split ticket voting declines really dramatically. And relatedly, by the way, this is something interesting, which is that borrowing costs go up. If a local newspaper goes up, the government in which that (newspaper) cover(s) will suddenly face, it'll cost more for them to borrow money. And the reason is lenders aren’t dumb and they say, well, no one's watching the store anymore. And so for what it’s worth it feels like a little bit outside the scope of the book, but I think there's a pretty strong case for subsidies for state and local media, and that it would be cost effective for government to do so because it would reduce their borrowing costs. And so governments generally don't like the press that's covering them, but like it's good for them in the end.
GR: That's interesting because I've had a couple of guests in the past that have made the argument for some kind of public financing of state and local media coverage but they've never framed it that way, that it's in the government's own interest to do that, that's fascinating. You're listening to the Campbell Conversations on WRVO Public Media. I'm Grant Reeher, and I'm talking with David Schleicher, the Yale Law School professor is an expert on state and local governments and their financing, land use and urban development. And he's got a new book out titled, “In a Bad State: Responding to state and Local Budget Crises”. So one obvious question I want to put to you is, are there any states or localities that have, in recent years, been in your view, models of financial responsibility?
DS: So it's an interesting one. So for the last, say, 40 years before the last five years, five to ten years, Connecticut was one of our great fiscal basket cases. They created a pension system and just didn't save any money for it for a really long time. And the belief was, I think something along the lines of the Mad Men era will never end. Companies will always leave New York and move to Connecticut. Fairfield County will keep shooting off money. And as a result, the state doesn't need to worry about things. And so then it went through a period where this started to the - it passes an income tax in the early 1990’s and generally enters in a period of retrenchment but not successful. It is along with New Jersey and Illinois and Kentucky are the most indebted states. But in the period they starting in 2017 they make a couple of major policy changes that have led to some real fiscal policy successes. And so, one is that they did something really interesting which is they inserted into their bonds, their promises to lenders, a series of fiscal promises, things that they would do. And all states have fiscal rules but they're generally difficult to enforce but the promises are now enforceable by investors. And one of these things is something called the volatility cap, and that sounds super technical, but the basic idea is that Connecticut, like New York and like California and a number of other states is heavily reliant on very volatile revenue sources. Basically rich people's capital gains and income taxes. And what the volatility cap said was that if revenues come in above expectations, the money is automatically saved. It can't be spent by the legislature, it goes first into the rainy day fund and then into the pension funds. And the combination of this enforcement mechanism and this policy and then a will of the governor and legislature, neither cutting taxes too much, they cut taxes a little bit or raising spending that much had made Connecticut turn from being a New Jersey style basket case into the success story of the COVID era. So in COVID, during COVID, every seat got like, the economy was doing well, much better than people expected, particularly capital gains were doing really well. So you had this volatile revenue doing really well, stock market did really well. And then the federal government provided a lot of money in order, it provided money to everywhere such that it wouldn't create too much more hazard in the places that really needed it, like the MTA or wherever. And the result of this was that Connecticut had this big volatile revenue source and they actually did very well do some technical things involving inflation as well. And as a result, but they could have just spent all the money, but they didn't. And that is a I think is maybe the great success. Again, it's not a state that has always been prudent. So like, Utah is one of these states that’s like, got good credit is the federal government. It's like just, you know, Virginia also, but Connecticut is a real success story in that you saw real change. I think real credit goes to the right politicians from both parties in that state for not pushing the envelope when they could.
GR: So Utah, Virginia, historically good financial states, Connecticut, is shifting story. Right now, who are the worst offenders at this moment?
DS: The book is about what are the legal tools that are available if a crisis happens. I want to state, I'm not a credit analyst, I'm not heading new investment by which municipal bonds you shouldn't buy or anything. That's not what I'm doing. Yeah. I mean.
GR: We’ll put that disclaimer out there (laughter).
DS: (laughter) I mean, you have a couple of ones which are like Illinois is doing a little better than it was, but it's still, you know, in has very substantial fiscal problems, New York and California are the other ones that you put in there. But the basic story is that it's a little hard to know right now because, again, everyone's budget was in great shape this year, almost everyone’s budget was in great shape this year. The question that is out there and it is as much a question of politics as it is a question of just sharp numbers, is what policies did you take during the boom? They're going to be really hard to reverse in the bust, right? And some of those are promises. So, for instance, New York City has signed a lot of contracts with public workers that have had implications in out years. But other things are just policy choices that are harder to reverse. So, for instance, New Jersey, I’m keeping it Northeast for obvious reasons, New Jersey just passed a special tax cut for older property owners. And this is the kind of thing that people grow to expect and it's going to have fiscal implications. And so this year it’s fine, next year, the year after, when these people have gotten to expect it is going to be really hard to take that back. On the other hand, not taking it back. It's going to mean having to cut other places really severely.
GR: Well, you mentioned New York kind of in the problematic category a couple of times. Of course, I wanted to ask a couple of questions about that. So, this first one gets to when you mentioned you know, Connecticut could have spent all the money and they didn't I immediately thought of New York. And so perhaps on that note, let me ask you this. You know, New York, it was facing a significant budget deficit during COVID and then got, as all the states did, big injection of federal money to help out with that. But then the state turned around and raised state spending even further in the next budget. And it's been setting records in real terms for state spending every year and did so again this year. So at the same time that's going on, the population of the state relative to other states is going down. In the last two censuses, New York has lost three congressional seats total. So, people look at this, and I guess I'm one of them, and not necessarily from a political party perspective, but this just doesn't seem sustainable. I mean, is this is this sustainable?
DS: It’s a good question. I mean, there are a bunch of things going on in that question, I want to separate them a little bit.
GR: Okay.
DS: So one is the population trends in New York. And I really think that you can't talk about the population trends in New York as one story. You’re really (talking about) two different stories, there's a downstate story in upstate story. And the downstate story is not really a tax story, exactly. Property prices, real estate prices for housing are still extraordinarily high in Westchester and Long Island and in New York City. And the reason for the prices are so high is that they don't allow any housing to get built. I mean, any. Nassau County is the slowest growing rich county in America. People sometimes think about San Francisco as the place where housing doesn't get built, but nothing can beat Nassau County. Nassau County is the single slowest growing rich county in America…close to it, it's in the competition. And Westchester is a little better, but not much better and New York City is not that much better either. (In) the whole area, New Jersey has some growth. And so the reason population is falling there is not because of long run fiscal trends or long run economic trends, though certainly work from home is taking a hit for New York City itself, but rather on their regulatory decisions, because otherwise the case the prices would fall, whether they would substantially, but like, if you buy a house in Great Neck, have fun, you know? The upstate story is a story of economic decline. I mean, long run economic decline that is itself probably aided by the cost, the excessive cost of government. And so that is a different type of story. On the other hand, there's population decline in places that are quite like the rest of New York State. So in Ohio, in Michigan, you know, and so it's, the other thing I'd say about New York State and its fiscal situation is like, will it be able to continue under these circumstances? And that's like the I'd say it's the million dollar question, but it's billion dollar question or multibillion dollar question. New York State is really notable in not only that it has fiscal problems that other states do, but the cost of government in New York State is extraordinarily high. And so one kind of very easy version of this to see is the MTA, which runs transit, that if you look around the world and try to find the most expensive tunneled subway projects in the history of the world, do you know what number one, number two and number three are? East Side Access, which is the LIRR to Grand Central. They are the seven train extension to the West Side and they're the Second Avenue subway. And this is true about the MTA, but also broadly true about New York state government, which is that New York State government is remarkable for what citizens get, it’s a remarkably expensive proposition. And I think the hope of New Yorkers, and by the way, I'm a New Yorker too, so just so we're clear, like I'm paying these taxes. I work in Connecticut, but I live in New York City. The hope is that fiscal pressure will encourage government to make it more effective. That is to say, when we have less, we're going to figure this out. The worry is that we won't and we'll just get less and less.
GR: So I'm going to change the subject a little bit, let me take a break here just to remind our listeners who we're talking to. If you've just joined us, you're listening to the Campbell Conversations on WRVO Public Media. And my guest is Yale Law School professor David Schleicher, and we're talking about his new book, “In a Bad State: Responding to State and Local Budget Crises”. I do know from many conversations with individual state legislators, maybe more outside of New York State than New York State, but nonetheless, a lot of these legislators really do worry about what the other states around them are doing regarding regulation and taxes and welfare and health care policies, on the one hand, and then losing or attracting businesses and wealthy residents on the other. You've kind of spoken to that in talking about New York. And, you know, political scientists call this interstate competition, the competition among states thinking about this. How does that affect things that, the kind of things that you look at, do you think?
DS: Yeah, so it's interesting. I mean, so it's a little less in this book, but it's something I've worked on, which is that we've a real question about why people move between jurisdictions. And one story which we associate with the economist Charles Thibeault, is like people are moving to get public policies, right? So you're moving to get taxes one way or another. You get lower taxes, better schools. And this is certainly true. And so on the other hand, a lot of people, movement decisions are driven by other things. New York City has had high taxes for a really long time, and they've had particularly high taxes on rich people. And I don’t think the rich people stay in New York City because they love the taxes and the garbage on the street. But I do think there's going to be new pressure on government created by work from home. They say people are going to be more mobile than they've been. At least some subclass of workers are more mobile than they've been. And that's going to increase interstate and local competition.
GR: Interesting. So we've just got a couple of minutes left. And I want to squeeze this last question in, it's about Syracuse more specifically. And I know that you're not an expert on Syracuse, but you do study urban development and land use. And in Syracuse, we are currently facing two very large issues regarding this in the coming years. One concerns the redevelopment of a chunk of land under and around an elevated highway that is now coming down. And the other is the construction that's going to happen in the next few years of this huge chip manufacturing complex from Micron that's going to bring a lot of high paying jobs to the area and really change the local economy. So, I know you're not an expert on those particular things, but my question is, are there any general do's and don'ts on these kinds of big urban development, economic development questions that you would throw out there that people here in Syracuse might want to bear in mind?
DS: Yeah. Two things I’d say. The first is that if you're going to get a big shot like a giant chip manufacturer, one of the keys is accommodating it. And so you need to allow housing to be built nearby and Syracuse has plenty of housing in a lot of ways. And so but you need to invest in the variety of things that go along with it. And there's always an instinct to see how you can tax it as much as you can. There's this new thing how can we take it? How can we squeeze this lemon as much as we can? But one of the things that makes jurisdiction like, that's an attractive thing to do, right? So we want to get revenue. But it's on the other hand, it's a like you can kill the golden goose. The second thing is that the cost of providing new infrastructure, in this case knocking down new infrastructure is extremely variable around the country. And people often say, well, as long as you get the project done, it's going to be fine, and you see that often. But the, one of the things to remember is that every dollar you don't spend on one project is a dollar that's available for something else. And that is just like hawk eyeing the cost of these things would be a good idea. But I mean, broadly, speaking, it's like it's great to get a giant dollop of federal money for your city, everyone loves that. And it's great to have a new big plant come in. And so, you know, it's, hopefully everything works out for Syracuse.
GR: Well, that's what we're hoping, too. We'll have to leave it there. That was David Schleicher and again, his new book, and it's very fascinating a really interesting historical perspective in a lot of different ways of looking at this issue is called, “In a Bad State: Responding to State and Local Budget Crises”. David, thanks so much for taking the time to talk with me.
DS: Thank you so much for having me.
GR: You've been listening to the Campbell conversations on WRVO Public Media, conversations and the public interest.
