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One country under debt

interior-debt2011Published in the Sunday Herald on January 23, 2011.

According to the most recent violent crime statistics, Camden, New Jersey, is the second most dangerous city in the United States. So when it announced that it was laying off half its police force, it caused an outcry.

The Fraternal Order Of Police took out an advert in the local paper warning that Camden would become “a living hell” if the cuts were made. But faced with a $26.5 million deficit, Mayor Dana Redd had little choice. This week, 167 police officers handed in their badges. A third of the city’s firemen did the same.

To Camden’s residents, this was merely the latest chapter in a long history of neglect. But it also chimed with an ongoing national conversation about public services and public debt. How deep is too deep, where cuts are concerned? Who should be asked to sacrifice, to balance the budget after years of wasteful spending?

On Tuesday, President Barack Obama will deliver his third State Of The Union address. He is expected to focus on deficit reduction, which has been adopted as a signature issue by the opposition. Before the winter is out, Congress will be asked to extend the federal debt ceiling beyond the $14 trillion that the USA currently owes its creditors.

Republicans in the House Of Representatives have sworn to cut $100 billion from domestic spending programmes. This would involve substantial cuts to everything but defence, social security and health care for the neediest. An editorial in Thursday’s Wall Street Journal by senior Tea Party Republicans Dick Armey and Matt Kibbe suggested it is only the beginning. “Let’s scrap the Departments of Commerce and Housing and Urban Development, end farm subsidies and end urban mass transit grants, for starters,” they wrote.

The debt crisis is particularly acute at state level. Collapsing tax revenues and irresponsible policies focused on short term outcomes have pushed states perilously into the red. According to the Centre on Budget and Policy Priorities, 46 of the USA’s 50 states have cut services in the last two years. 30 have raised taxes. But few have taken adequate steps to address the true scale of the problem. Based on the most optimistic projection for its pension funds, California is in a $265 billion hole.

Last year, federal stimulus funds papered over the cracks, but that money is running out and Republican gains in Congress mean there is very unlikely to be more. “One way or another, 2011 will be a year of reckoning for the states, and for American federalism,” concluded conservative analyst John Hood, of the John Locke foundation. “State and local politicians will have to summon uncharacteristic levels of courage and backbone.”

New Jersey’s Republican Governor, Chris Christie, has come to national prominence for tackling the problem head on. Soon after he took office, last January, he declared “a state of fiscal emergency” and called for drastic action to reduce the debt. He rejected plans for a rail tunnel linking the state to New York, withheld some education funding and, most controversially, slashed the pensions and benefits of public employees. He also cast Camden adrift.
In common with many other New Jersey towns, Camden’s problems can be traced to the collapse of manufacturing industry. The first colour television was made in Camden, by RCA Victor, but that plant is long gone. The New York Shipbuilding Corporation that once employed 19,000 people has been shuttered for decades. Campbell Soup still has its worldwide headquarters, staffed by senior executives who live in the affluent New Jersey suburbs, but the actual canning and processing is all done elsewhere.

As a result, the population has shrunk from 120,000 to around 79,000. Average incomes are among the lowest in the nation, with two in five families living below the poverty line. The property tax base is inadequate for even basic services, meaning the city is dependent on state handouts. Three of the last six mayors have been sent to jail for fraud.

For seven years, the state of New Jersey took over the most important municipal functions. It spent $175 million rebuilding the city aquarium and expanding Cooper Hospital and Rutgers University but did nothing to address decades of chronic underinvestment in the poorest neighbourhoods. Last year, Christie cut the cord, reducing contributions to city budgets across the state.

County prosecutor Warren Faulk, who has lived his whole life in Camden, said it will be tough for the police force to cope. “We still have almost as many officers on the streets, but follow-ups, crime scene and detection has been cut. So what we’ll be lacking is the gathering of evidence, the taking of statements, the investigations that provide us with the proof we need to convict.”

Camden’s situation is far from unique. Across the USA, politicians are being asked which formerly untouchable services to cut. California’s new Governor Jerry Brown has admitted that closing this year’s $24.5 billion budget gap “will demand courage and sacrifice.” Even oil-rich Texas is something like $10 billion short.

This is partly a result of the recession. Sales tax, income tax and property tax revenues have all declined precipitously: states had to find around $190 billion in savings last year and must cut an estimated $160 billion more this year. But it’s also a consequence of profligate spending, calculated to maximise short term political gain.

Faced with tough choices, states have consistently taken the easy option, covering up their deficits with accounting gimmicks and short-changing public employee pension funds. New Jersey has not made its contributions for 15 years. Christie recently refused to make a scheduled $3.1 billion payment, to force concessions from the unions. He has demanded that retirement age be raised from 62 to 65. “If they want to sue me, get in line,” he said. “I have plenty of lawyers.”

In May, Christie vetoed a proposal to levy a new tax on New Jersey’s millionaires. The new Republican Governor of Florida, Rick Scott, has promised to lower corporate income tax, describing it as an enemy of growth, even as his state faces a $5 billion shortfall.

Some states are discovering that they have no option. In his inaugural speech, the new Governor of Minnesota, Mark Dayton, challenged his critics to produce a balanced budget with no tax increase. “If you can do so without destroying our schools, hospitals and public safety, please send me your bill, so I can sign it immediately,” he said.

When Illinois raised its personal income tax from 3% to 5%, neighbouring states encouraged businesses to move. A New York Times editorial argued that the state had done the right thing: “With federal stimulus aid ending, states are in for their worst year in generations, and they cannot get out of it by either cutting or taxing alone. Illinois is figuring that out, finally. Too many other states are still in denial.”

There is no clean ideological break – the Governor of New York, Andrew Cuomo, a Democrat, has also described raising taxes as a last resort – but the zeal for cutting services is keenest where Republicans are in charge.

In the Arizona state legislature, the Grand Old Party has a two-thirds majority. “They can pass what they want, when they want,” Democratic commentator Craig McDermott told me. “All they want to do is cut taxes. They don’t want to pay for infrastructure or schools.”

The state’s total budget is around $9 billion and shrinking fast. More than $2 billion has been cut in the last two years and another $1 billion must be found this year. Nursery hours have been reduced from a full day to a half day across the state, parks have lost 80% of their funding and most of Arizona’s highway service stations have been closed, prompting protests from truckers. The state parliament building has been sold off and leased back.

“What they really want is to cut so much that they get to cut taxes some more,” McDermott said. “There are bills in the legislature to cut corporate income taxes and to shift the property tax burden away from businesses and on to homeowners.” This week, politicians voted to lower the threshold for state health care from 100% of the national poverty level to a third as much, meaning a family of four would need to earn less than $7,100 a year to qualify.

“We believe that we’re in this mess because when times were good we dramatically increased spending,” Republican Representative John Kavanagh told me. “We can’t maintain those extraordinarily high levels. If we do drop health care eligibility, it won’t be to third world country, Calcutta conditions.”

The national midterm elections swept a new class of hardline conservatives into power, with a mandate to reduce the size of government. Representative Paul Ryan’s Roadmap For America’s Future offers the clearest glimpse of what that might entail. Unlike his colleagues, he suggests taking the politically unpopular step of privatising social security and health care for pensioners. “My point is, get it done now, or it’s hard-core, Greek-like austerity later,” he told the New Yorker magazine.

It will be interesting to see how Republican promises to tackle the debt stand up to the realities of legislating. It is much easier to talk of cutting an abstract figure of $100 billion than it is to decide where the axe should fall, when it involves taking back $1 of every $6 being spent by NASA, the FBI, the National Parks or programmes that feed pregnant women and keep pensioners warm in winter.

On Thursday, a Republican Study Committee proposed cuts of $2.5 trillion over a decade. This would reduce the federal workforce by 15% and decimate funding for law enforcement, education and transportation. Buoyed by its electoral gains, the party’s conservative wing believes voters are ready for the strong medicine it prescribes. “I have never seen the American people more receptive, more ready for the tough-love measures that need to be taken to help fix the country,” said Ohio Representative Jim Jordan.

In a New York Times poll, released on Friday, a majority of respondents preferred tough spending cuts to increased taxes as a means of reducing the deficit, but when pressed for specifics, few were willing to countenance changes to Social Security or Medicare, which are by far the biggest drains on government finances, alongside defence spending. A bi-partisan fiscal commission has already concluded that cuts alone cannot balance the books.

Obama’s former economic adviser Christina Romer wrote that “the president has to be frank about the need for more tax revenue” in his State Of The Union speech. But in the abbreviated American political cycle, in which every other year is an election year, an honest conversation about tax and spending is the last thing either party wants.