State Budgets Under Stress: Paths to Sustainability
June 23, 2011 | Speech | Policy Research, Improving the Nation's Fiscal Future

Remarks as prepared for delivery at a dinner discussion preceding the conference, “State Budgets Under Stress: Paths to Sustainability.” MacArthur hosted the conference in partnership with the Federal Reserve Banks of Chicago, New York and Philadelphia, as well as the National Association of State Budget Officers.

MacArthur is glad to be working again with the Chicago Fed to help inform the American public and policymakers of the fiscal realities facing our state and our country. Last summer we co-sponsored a public forum on the fiscal crisis that drew more than 300 people. So there’s evidently deep public interest in this topic and I look forward to another substantive discussion tonight.

You might know MacArthur because of our Fellows program — the so-called "genius awards," — or sponsorship of public broadcasting, or because you noticed that we seek a “more verdant world.” How do we connect to the question of government budgets? In fact, we have a long record of addressing large social issues, from community development in America’s cities to the implications of an aging population.

Few issues are larger than the fiscal crisis facing governments. In 2006, David Walker, then Comptroller General, came to MacArthur and impressed on us the grave situation at the federal level. He suggested that the U.S. could face catastrophic economic failure if we did not adopt more responsible policies.

The next year, the Foundation funded the National Academies of Sciences and Public Administration to convene an expert committee and develop scenarios for long-term fiscal sustainability at the federal level. The committee’s report, Choosing the Nation’s Fiscal Future, was released in January 2010 and helped inform the President’s National Commission on Fiscal Responsibility and Reform, and other credible efforts to address the issue. I was pleased to see a dog-eared copy on the desk of the co-chairman, Erskine Bowles, when I met with him a year ago.

In June 2010, we joined the Peterson and Kellogg Foundations in supporting AmericaSpeaks, an exercise that brought together thousands of citizens by nationwide satellite link to seek budget solutions that they could agree on.

And we funded the Urban-Brookings Tax Policy Center to model how catastrophic budget failure would affect America’s ability to borrow, the dollar’s reserve currency status, and more.

As we worked on the federal situation, it became clear that the states faced a similar challenge which was having immediate consequences. State governments are on the front line of delivering services: health, education, public safety, courts and prisons, transportation, and other areas essential to all citizens — particularly to the poor and those with special needs.

The states are addressing the crisis by passing on costs, reducing benefits, cutting programs, and privatizing. We could be seeing a fundamentally different relationship developing between citizens and government as ordinary people have to pay more for public services and, at the same time, lose benefits.

Another large trend has caught our attention. While many Americans are experiencing hardship, others at the very top of the economic ladder are in a period of extraordinary prosperity. Between 1979 and 2006, the top one percent of Americans saw their incomes rise 256 percent; the poorest twenty percent gained only 11 percent. And during the economic expansion of 2002-2007, two-thirds of income growth went to the richest one percent of families.

We think that the combination of a fiscal crisis for government and growing economic inequality may be dangerous. We worry that it could create resentment, alienation, and a divided, less stable democracy.

The MacArthur Foundation is already invested in addressing the fiscal crisis. We encourage our political establishment to be honest with the American people about how serious and urgent the situation has become. We look for clarity in defining the problem, and bipartisan courage in working toward a comprehensive solution. And we hope for ways forward that are equitable, preserve a robust safety net, and encourage economic growth.

But we are also interested in learning more about the causes and consequences of concentrated wealth.

Clearly, the causes are complex, not fully understood. Social and demographic changes, globalization, technological advances, and relaxed financial regulation have each played a part. Some political scientists have also suggested that government policies enacted by both parties over the last several decades, including tax policy, have skewed the social and economic playing field.

The most obvious consequence has been to channel more benefits to the wealthiest and to put pressure on an increasingly less secure middle class. But there are other consequences, less clear, that could be compelling. For example:

  • In a political system fueled by campaign contributions, those able to give more money will have greater influence with elected representatives. Have our representatives become more responsive to big donors, neglecting the concerns of ordinary citizens?
  • Has government policy contributed to the loss of manufacturing jobs, decline of unions, and other factors that have undermined middle class prosperity?
  • Have the wealthiest Americans become so removed from reliance on government that they no longer identify with the average person’s interests? Are we becoming a divided nation?
  • Could extreme inequality weaken traits we think of as distinctively American — aspiration for a better future, a sense of fairness, and the inherent equality of all citizens before the law?

It is too early for us to know where this line of inquiry will lead us, or whether there will be anything a Foundation like ours could do in response. But it would be remiss of us not to pay close attention to one of the most notable trends of our time.

Let me end by reiterating our core concerns. First, our nation and the states must take concerted action to secure our fiscal future. Our representatives need to face up to the consequences of past promises and avoid making hollow promises for the future.

Second, we cannot lose sight of the truth that our policies and budgets are not abstractions. They have direct effects on citizens, their education, healthcare, and other services. Where we have to cut spending, we must take pains to minimize harm and preserve essential infrastructure.

We all share a commitment to resolving our fiscal crisis. I look forward to our discussion tonight and during the conference tomorrow, confident that it will reflect America’s best values, a balance of competitiveness and compassion.

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