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An ongoing discussion about conservatism in New Jersey.
In (Partial) Defense of Government Borrowing
Peter C. Hansen  (March 22, 2010, 11:07 pm)

Governor Christie gave his budget speech on March 16, 2010, and it is certainly worth reading. It is serious, sensible and far-ranging. Hopefully he will be able to sustainedly pursue the agenda he has laid out. The only point in the speech that gave me pause was the proposal to constitutionally cap spending and property-tax rises at 2.5%. A more practical number would be the rate of inflation, which can fluctuate dramatically over time without affecting "real" spending.

This quibble over caps led me to a throwaway political line amidst all the good sense and worthy proposals:

Over the course of two decades, time and again the State has borrowed to pay its every day bills. You wouldn’t do that in your own home, and we shouldn’t do that with your tax dollars.
Christie meant that the government should not incur long-term debt to maintain imprudent spending levels. This is certainly true, but this line also provides an opportunity to consider the proper and improper uses of state borrowing. A viable theory of NJ state spending cannot be developed without understanding the distinction between these uses.

Short-Term Borrowing Is Actually a Necessity for Governments

In reality, it is perfectly natural for a state to borrow for everyday bills. The state requires a steady cash flow for expenditures, and borrowing keeps the state from being held hostage to tax returns at each cycle. This is why many businesses have a line of credit. If payroll had to depend on sales every week, a lot more businesses would fail. This is why toy stores aren't open just at Christmas.

There is no practical way for a modern state to arrive at a fixed and predictable revenue except through short-term borrowing. Feudal rents were not viable even by Henry VIII's time. The ancient and early modern worlds also tried tax farming, i.e. trading the state's right to collections in return for a discounted, up-front fee paid to the state. (See Mathew in the New Testament, or the General Farm in ancien régime France.) Such abusive but state-sanctioned exploitation of citizens by private tax farmers is impossible in a representative democracy.

One cannot even just fix expenditures below the lowest possible projection for future taxes. Such an estimate may be in error, manipulated, rendered useless by unexpected shocks such as an invasion or pandemic, or subject to tax reductions to avoid constant surpluses (with an attendant risk of deficit).

In short, borrowing cannot be avoided. It must simply be managed well, and for the right purposes. To manage borrowing properly, the Legislature must match: (1) the majority's willingness to allow tax collection; against (2) purchasing choices, both short-term and longer-term. Each of these factors is subjectively determined and thus fraught with peril. They are also what have harmed New Jersey so badly over the years.

Factor One in State Borrowing – The Majority's Willingness to Allow Tax Collection

The voting "majority" is not necessarily the majority of taxpayers. If the state can get consent from 51 percent of the population, taxpayers or no, it can ransack the other 49 percent. Thus, when a large class wants to get a smaller class's property, they elect legislators happy to confiscate and transfer in the state's name. The level of confiscation is exacerbated when highly "progressive" tax regimes allow a majority of people to pay little or no tax. This freedom from consequences allows a large plurality or even an outright majority to order a confiscatory free-for-all on the taxpaying minority. (The flight of asset-holders from New Jersey indicates that just such an assault has been taking place. As Christie said after noting that $70 billion in wealth left the state from 2004 to 2008, "if you tax them, they will leave.")

Leaving mass politics aside, an elite may unilaterally claim the mantle of confiscator to benefit a favored class. Abusive "blight" designations have been a common such practice in New Jersey, whereby an owner is expropriated, allegedly for the tax-revenue benefit of the town. The Abbott regime is another classic example. Suburban funds are confiscated for transfer to designated beneficiaries like Camden and Newark. Fascinatingly in the case of Abbott, the level of forcible transfer was set at the spending level of the wealthiest towns. This grand gesture – using other people's money – disadvantaged the vast majority who did not live in the wealthiest towns. These many unfortunates have been forced to reduce their own education in order to turn over funds to certain favored cities. Those whose funds are confiscated have no say in how these monies are spent. What decided this transfer was raw judicial power, however, so an accounting has been politically unnecessary. It is akin to explaining feudalism to serfs. It doesn't change the situation, and threatens orderly compliance.

Whether it is a voting bloc or a power-wielding elite that orders the confiscation, the underlying principle of taxation is always the same – one is free to confiscate as much as one is able to do so. The only real limit is the one placed on the raw ability to take. One cannot confiscate where the polity does not allow it. Such denials used to be effected by revolt and revolution. Now it is done by the more civilized and periodic mechanism of the ballot box. The Christie election, like the Whitman election, was an effort by a temporarily active majority demanding greater limits on taxation. If this incensed majority can sustain itself against the ravenously confiscatory one that normally prevails, New Jersey can heal, at least until confiscations no longer raise the ire of a voting majority.

To minimize the majority's willingness to allow tax collection, the members of the majority must each feel precisely the pain inflicted by the allowance. Willingness to tax would thus be calibrated exactly to one's financial pain threshold. This route is impossible, however, because not only would suffrage be limited to taxpayers, but votes would have to be weighted by percentage of income paid in taxes. Such measures are not feasible in practice or compatible in theory with democracy.

Ameliorative measures remain possible, however. First, tax rates can be made less progressive and indeed should be flattened as much as possible while ensuring adequate revenue for prudent spending. Second, constitutional and legislative rules should be put in place to make increased taxation difficult. Christie's proposed 2.5% cap on property tax increases is a relevant if blunt instrument in this regard. Many other rules are possible and should be explored, including a requirement that state tax increases be approved by legislative supermajorities, and that local tax increases likewise be approved by supermajorities as a condition of receiving state funds.

Factor Two in State Borrowing - Public Purchasing Choices

The state has only one purchasing choice that it cannot avoid, and that is to ensure its basic existence. The federal government has relieved New Jersey of the need to defend itself against invasion, so the Garden State's minimum expenditures are limited to demonstrating its existence by maintaining a few executive offices, a small legislative apparatus and a judiciary, and by conducting elections to maintain a republican form of government. All other expenditures are imposed by the free choices of the people (via the NJ Constitution) or the Legislature.

The raw power of state confiscation ostensibly serves the ends decided by the state. The Legislature is expected in theory to weigh the "public good" for the state as a whole when deciding on these ends. Considerations of rights, utility, expanding opportunity and prudent planning should presumably factor into the Legislature's deliberations. This elevated and philosophical framework is what ostensibly divides the state government from a Kelsenian "band of robbers" like the mafia.

In reality, little such deliberation takes place. Legislators are necessarily special pleaders for their districts, and they often choose to act for favored persons and factions as well. Despite this parochialism, it is intended that enlightened self-interest by these special pleaders will lead to debate, decisions and compromises that benefit the state as a whole. This idealistic process is easily subverted in practice. A clever legislative leader will keep interests from competing, and will instead seek to satisfy all interests in exchange for loyalty. The earmark is a prime example of such a perversion of the Legislature's public mission.

What allows such an avoidance of discipline and duty is the availability of long-term credit for deficit spending. Since states must have financial wiggle room to deal with longer-term emergencies than mere cash-flow hiccups, and since it is nearly impossible to structure long-term projects in the absence of a predictable revenue stream, the state must be able to access long-term credit. This is equivalent to a family's home-equity credit line. This can be a useful tool to buffer against major emergencies, or to undertake relatively safe and high-yield investments (like critical infrastructure), but when such debt is assumed simply to avoid prudent choices between spending proposals, the Legislature dangerously abuses the purpose of the credit line and its public duty.

This is precisely what has happened in New Jersey. Far from attempting to set realistic spending plans in light of best-estimates of future revenues, the Legislature treated one-off payments like the federal stimulus as permanent revenue sources in later budget-setting. Moreover, the "public good" that the NJ Legislature (and many local NJ governments) prefer to produce above all others is public-sector employees who can legally organize to lobby and elect legislators. As Christie stated:

State spending grew 59% from 2001 to 2008, before the current recession forced us to make do with less. That is bad enough, but as you know, more than half of what the State spends every year is sent to local governments, in the form of aid for municipal government and school districts. And local government has exercised even less control. Spending at the local government level has risen 69% since 2001.

Even now, in the depths of a great economic crisis, local governments and school boards can’t hold back on the pressure that comes from the public sector unions. What is the proof? While New Jersey’s private sector lost 121,000 jobs just in 2009, New Jersey’s local governments added 11,300 new municipal and school employees. 11,300 new government employees paid for by your taxes just this last year. 11,300 new employees added while you are struggling to keep your job and pay the bills. We must give the voters the tools to stop the madness and stop it this year.

More than just current salary make NJ civil servants hideously expensive. Arguably worse are public pensions:

The pension system has been so generous that it has created a flood of liabilities. From 2002 to 2008, pension payments to retirees grew 56%, triple the inflation rate. Our benefits are too rich, most public employees contribute too little, and the taxpayers have had enough – enough of out of control pensions to public sector unions while they are losing their own jobs, enough of losing their homes, and then being told by the union bosses that they must pick up the tab for rich pensions at the same time.
Christie also sensibly targets the teachers' union (rather than teachers themselves):

I honor the service of good, conscientious teachers who care deeply about training the leaders of tomorrow for our state. The leaders of the union who represent these teachers, however, have used their political muscle to set up two classes of citizens in New Jersey: those who enjoy rich public benefits and those who pay for them. That has created a system that cannot be sustained – a system fueled by mandatory dues of more than $700 a year taken out of every one of the nearly 200,000 teachers’ paychecks. Political muscle fueled by intimidation tactics, political bullying and smears of public officials who dare to disagree.
Legislators have a natural conflict of interest when they allow public-sector employees to take collective political action. Elections become ever more a closed shop, with public-sector employees and legislators supporting each other on the backs of the rest of the population. (See here and here for more discussion of this.) Because of the massive overgrowth of the NJ civil service (see here for details), every person in the Garden State now owes $4,100 in state debt obligations. For a family of four, that's $16,400.

To restore fiscal discipline, so that purchasing choices are again properly made, the following initial measures are necessary to address the largest ills: (i) reduce the symbiotic and devastating relationship between legislators and a unionized public sector by eliminating the latter's right to conduct political activity; and (ii) reduce pensions for public employees to private-sector levels. (If public-sector salaries are below private-sector comparables, public salaries should rise instead of encouraging "lifer" behavior through expectations of an outsized pension.) Fortunately, Christie's election has already sparked some needed moves for reform in this area.

Next, the Legislature should: (i) couple adoption of a budget with adoption of an official and non-partisan projection for the following year's revenues; (ii) classify all of the next budget's spending above this official projection as "emergency" and require a separate vote on each such line-item (each such item being worth no more than a set amount); and (iii) require a separate vote on each "emergency" line-item before transferring it to "regular" spending.

Conclusion

Christie's speech was a welcome breath of fresh air, and he seems both prudent and serious in approaching reform. He does not seem wild or arbitrary. Far from it, he appears thoughtful and humane. At the same time, he is taking the fight to the public-sector unions, and this is without doubt necessary. Indeed, it is laudable. Kudos to Christie for not ducking this fight – many would. Here's to hoping he is ready to stick it out when everyone in officialdom appears to abandon him down the road. There is a vast and suffering majority in the state that wants him to succeed, and if he keeps to his course and pursues victory, he will have this same majority with him.