In Stockton, California, the murder rate is rising, as the police department has had to lay off several dozen police officers. Others in the department have resigned themselves to asking for their pink slips or accepting lower salaries. Stockton’s fire department is in a similar predicament.46 Shrinking police and fire departments and slower emergency-response times are not what residents sign up for when they scribble their signatures on mortgage documents. This is not the American dream pitched to them by Realtors, politicians, and history books. The dream has been replaced by fears about whether or not their homes will sell or their streets will be safe. Unfortunately, this nightmare is an unavoidable reality for some cities and states struggling to balance budgets. Imagine you live in one of those Colorado communities where police response times have increased from twenty to sixty minutes. Imagine there’s an armed robbery or violent assault in progress—with perpetrators seemingly free to commit any crime with the knowledge that they’ll be long gone before police ever show up.
In Arizona, a state whose economy is still reeling from the real-estate crash, surviving municipal budget cuts has become a way of life in many communities. Surprise, Arizona, for instance, has been forced to eliminate support roles at its police and fire departments in order to cut costs. While police officers’ and firefighters’ jobs were saved, their responsibilities have been extended, putting a strain on core police and fire services and the departments’ overtime budgets. Other cuts included $50,000 in reductions on spending for training and supplies. In other words, some of these policemen or firefighters don’t even have the proper training or equipment to protect their city—all to save $350,000. What is the cost of a lost life or a burglarized home?47
With fewer police officers and firefighters, crime rates will inevitably go up, as is already happening in places like San Bernardino, California, and Orlando, Florida. There is no Bruce Wayne or Peter Parker to keep the city’s streets safe. Communities will have to get used to lower-quality policing—lower-quality everything, for that matter. “We’re going to have to learn to fend for ourselves,” Nick Gonzalez, president of a San Bernardino neighborhood group, lamented after his city declared bankruptcy and made such deep cuts to police that property crimes might now go uninvestigated.48 Clearly these aren’t the neighborhoods of yesteryear with tree-lined sidewalks and mail carriers we knew by name extending their greetings to our mothers once we reached home. Rather, the new standard encourages neighborhood watch and vigilante justice, libraries closed on Sundays (and sometimes Mondays too), and shorter hours in the municipal pool—all of which erode quality of life and make the decision to pick up stakes that much easier.
California is going to have a hard time digging out of its fiscal nightmare. Just as excessive leverage gave investment banks like Bear Stearns no margin of error during the financial crisis, there’s little budgetary wiggle room for states that carry outsized debt loads. Indeed, it’s sadly ironic that a state whose latest boom was so tied to real estate has a law, Proposition 13, that prohibits municipalities from raising property taxes meaningfully enough to keep towns and cities properly funded. California allows a police chief to retire with a pension of over $200,000 after less than a year on the job but doesn’t have enough money to buy new books for classrooms or to keep violent felons in jail. No wonder the state is facing an exodus of employers and employees alike.
Things are very different in Indiana, especially when it comes to education. Since 2000 Indiana has increased state spending on K-12 education from $3.9 billion to $7.6 billion and spending on higher education from $1.3 billion to $1.8 billion. Since 1990 the percentage of Indiana’s population holding a college degree has increased by almost 50 percent. It still remains too far below the national average, but the metrics are heading in the right direction and the gap is narrowing. The K-12 story is even stronger: Indiana’s high-school graduation rate is not only above national average but is also improving faster than the national average.49 Such things matter. They matter to businesses seeking to relocate or expand. They matter to investors deciding where to put their money. And they matter to families considering where to buy a house. With the housing-bust states showing few signs of pulling out of their economic and budgetary tailspins, these decisions have never been more clear cut.
Chapter 6
The New American Poverty
As of this writing, there are more Americans falling into poverty, and they are staying in poverty for longer than at any time in recorded history. The most dangerous deficit in the United States is not the federal deficit but the jobs one. It is truly the Achilles’ heel of the U.S. economic recovery. Not only do unemployed people fail to contribute to the carrying costs of public services by paying taxes, but they also demand more of those services. When someone loses their job, they need Medicaid because they no longer are covered by private-plan employer coverage. They collect unemployment insurance. Some need job training and food stamps. Poverty erodes not only the morale of community but also the communities themselves.
Consider Mississippi, a state emblematic of the struggle to reduce poverty in the United States. The days of King Cotton are long, long gone. Today Mississippi is better known for shameful poverty or as the home of Forrest Gump. There was no housing boom in Mississippi, even though proportionally more people owned their own homes than in any state in the United States, save West Virginia. Mississippi residents simply didn’t have any money to speculate on real estate. In fact, there hasn’t been much money to go around for any big investments. Job growth remains near nonexistent, per-capita income is the lowest in the country, there is not one Fortune 500 company headquartered in the entire state, and Mississippi has barely had any population growth over the past ten years.1 Folks aren’t moving to Mississippi for a better way of life. Mississippi has become a welfare state, reliant upon federal aid to support its own people and infrastructure.
With more impoverished and unemployed, there are fewer workers contributing to the tax receipts of the state but more people needing state assistance. With such a large imbalance between those who need services and those who pay for them, the state has sunk deeper into debt, and municipalities have become more dependent on handouts from the state and federal governments. Income and property taxes, designed to underwrite education, infrastructure, and critical social services, don’t come close to covering the true costs. While the state has collected an average of $2,300 per capita in tax receipts, per-capita spending is more than twice that at $5,900 per capita. Some of that differential is borrowed money that the state must ultimately pay back. Mississippi has amassed over $17 billion in tax-supported liabilities, which is the equivalent of $6,600 per capita. That’s the twelfth highest in the nation—in a state for which average per-capita income was just barely over $31,000 in 2010. Another way to look at it: In 2010 Mississippi’s tax-supported liabilities as a percentage of GDP were on par with California and Nevada, two states that until recently had much faster-growing economies.2 Mississippi has been so bad off for so long that it’s hard to even imagine a time when Mississippi’s cotton truly was king. It’s even harder to imagine how the poor residents of Mississippi can pay off all that debt without a dramatically improved job market.3
Sadly, Mississippi’s poverty and dependence on federal aid are becoming less unique. Joining the likes of Mississippi, Arkansas, and Louisiana with 15 percent or higher poverty rates are a cadre of nouveau pauvre states that not so long ago had about as much in common with Mississippi as a quarterback does with an astronaut. As recently as 2000, Michigan’s poverty rate was two percentage points below the national average. Ten years later, the state’s poverty rate was nearly two percentage points above average, and federal aid accounted for over 30 percent of Michigan’s budget—not even including the auto bailout. Since 2000 Michigan’s population has actually shrunk, making it one of only two states in the country to experience net negative migration. From 2000 to 2010 poverty in Michigan jumped by over two-thirds to nearly
16 percent. Other states fared worse. Nevada’s poverty rate jumped by almost 90 percent from 2000 to 2010, well over two and a half times the national average. Florida, Nevada, and Ohio all went from poverty levels under 12 percent in 2000 to over 15 percent by 2010. One in five Americans lives in or on the edge of poverty (generally defined as annual income of $23,000 or less for a family of four). By 2020 that number is likely to be closer to one in four.4
The reality is that when businesses leave a state, so too do jobs, and there is no single factor more highly correlated with poverty than unemployment. Typically, four years after a recession an economic recovery would already be under way, followed by a meaningful drop in unemployment and poverty. Not this time. The so-called jobless recovery is costing more and more by the day. As of this writing, the poverty rate is 15 percent, up from 11 percent in 2000. In 2010, 24 percent of all federal spending, or $1.2 trillion, was spent on welfare assistance, up from 10 percent in 1980 and 18 percent in 2000.5 That last number is projected to jump to $1.6 trillion by 2016.6 States couldn’t afford to help all those falling below the poverty line were it not for federal assistance. Federal aid to states is at its highest level ever at over $600 billion, and it’s projected to be 17 percent higher, at over $700 billion, by 2016. Put another way, back in 1960 federal fund transfers to states were just 9 percent of total state monies; today they’re roughly 25 percent. The percentage of state monies derived from the federal government has bounced from 9 percent to 22 percent in the 1970s, down to the midteens in the 1980s, then back to the high teens in the 1990s, and has consistently been over 20 percent since 2000. The important question is “What has really improved since states began taking more federal aid?”7
The two primary segments of federal aid to states are Medicaid and food stamps. Today there are more Americans—forty-three million, or one in seven—living off food stamps than at any point in recorded American history. The federal government allots monies to the states for welfare, and it is the states’ responsibility to administer the programs. Some states are more generous than others. California spent over $10 billion in fiscal year 2010 on public assistance—the most it had ever spent on such aid—but in fiscal year 2012 public assistance in California is estimated to have declined, even though the number of those seeking aid actually increased.8 In 2000 over 7 percent of California’s budget was spent on public assistance, but by fiscal year 2010 that percentage was down to 4.9 percent, even though the number of unemployed in the state increased by nearly two million during that time.9 Michigan is following the same track as California, though states such as Florida and Texas are actually spending more each year on public assistance. Although federal outlays are intended to be doled out according to consistent standards, what’s happened lately is that the states whose residents need help most are spending less and less. The problem isn’t a lack of compassion but a lack of resources at a time of massive budget deficits.10
The cost of caring for the poor has been a burden largely assumed by the federal government, but as these expenses grow larger and larger, how long will this be sustainable? In 2010 total federal payments to individuals totaled $2.1 trillion, and that is expected to rise 29 percent to $2.7 trillion by 2016. Although the federal government pays for 98 percent of all welfare programs, the costs of administering welfare programs are split with the states. A considerable portion of the money distributed has an expiration date, leaving the state to make up any shortfalls. Some of the money distributed even comes in the form of loans, such as extended unemployment benefits. In today’s tax-challenged environment, the states are having trouble filling the void or even paying for the increased administrative costs. States with high unemployment, high debt levels, and little money for the job training required to pare welfare rolls are hardly in a position to kick in extra money. The faster the federal government has increased its assistance to the states with “special” assistance, the greater the barriers the federal government puts on the states financially in order to maintain that assistance to their residents. Not only has all this spending done little to get people get back on their feet—with jobs and out of poverty—but it has created a political dependency on aid that is about to get pulled right out from under those most in need. Six programs that began in 2008—and were designed as short-term fixes to help Americans through the cruel recession caused by the housing bust—will expire by November 2013. Five already have. When pundits talk about the “fiscal cliff,” they’re usually referring to the budget mayhem that would have occurred at the end of 2012—automatic tax hikes and spending cuts affecting everything from defense to Medicare—had Congress and the president not reached a budget deal. But there’s a massive fiscal cliff on the state level too, and the states most dependent upon special federal assistance are the ones most vulnerable. Between 2009 and 2011, 37 percent of state budget gaps were closed with ARRA money.11 Michigan, for example, simply delayed the pain of making necessary changes in its spending, and consequently, when ARRA monies started running out, the state and its municipalities struggled to pay their bills. Cities like Detroit, Flint, Pontiac, and Ecorse and school districts like that of Highland Park have come dangerously close to failure. Highland Park was eventually taken over by a state-appointed emergency manager—who promptly fired all the teachers and outsourced management of the school system to Leona Group, a for-profit education company. Leona is now charging the state $7,100 per pupil versus the $16,500 the school district had been paying to educate each student.12
In 2000 eight states had a poverty rate higher than 15 percent: Alabama, Arkansas, Kentucky, Louisiana, Mississippi, New Mexico, Texas, and West Virginia. However, by 2010 twenty-two states (plus Washington, D.C.) had poverty rates over 15 percent. Four of those “new” states moving past the 15 percent poverty threshold were California, Florida, Nevada, and Arizona—the four states hardest hit by the housing crisis. Fewer people were making it out of poverty, and many more were falling in.13 Poverty’s link to unemployment is undeniable, and the states wrecked by the housing bust are experiencing massive challenges of long-term structural unemployment. By 2010 Florida’s unemployment rate had gone from 3.8 percent in 2000 to 14.9 percent. Nevada’s unemployment rate had been higher than the national average in 2000 but still a mere 4.8 percent. By 2010 Nevada’s unemployment rate had more than tripled to 14.9 percent.14 Of course, the unemployment rate rose everywhere, but unlike in past recessions, the housing-bust states demonstrated an almost total reversal of fortune as measured by unemployment. High unemployment rates translate not only to lower income-tax revenue but also to greater demands on social services—a big problem in states struggling to close massive budget gaps. In California, Florida, and Arizona there is a chillingly rational 90 percent correlation between the number of poor and the number of unemployed.
Poverty Rate (2000)
Poverty Rate (2010)
Why is this growth in poverty in the United States occurring at such an astounding pace? The answer: jobs, jobs, and jobs. For decades, the housing boom papered over an undereducated and undertrained workforce with a strong and steady flow of new jobs in construction, real estate, and mortgage finance. Some states, such as Florida and California, had their entire economies transformed by housing. The housing bust exposed a labor force whose skills and training were simply out of date. The states that during the boom boasted the strongest rise in home prices, the biggest booms in new-home building, and the highest number of jobs created from the housing sector are now in the worst position to retrain their unemployed masses. Unemployment in Nevada, California, and Florida tripled between 2000 and 2010. Florida’s jump in unemployment was 50 percent higher than the national average. Whereas Alaska, Washington, D.C., Oregon, and Mississippi had the highest unemployment rates in 2000, by 2010 it was Nevada, California, and Florida topping the list.15
Without job training, food stamps and welfare just create another sort of dependency. Nobody wants to live on food stamps. Anyone who has witnessed the sh
ame and embarrassment of someone using food stamps at a local grocery store understands that. What people want are jobs, and it is ultimately the responsibility of the state to provide the training and economic environment required to create jobs. At a minimum it is in the best interest of the states to provide job training to get their residents back to work. However, unless the federal government specifically directs and administers monies for jobs training, most states cannot afford the large-scale job-training programs needed to resuscitate their economies. The Great Recession resulted in states depleting their unemployment-insurance trust funds as high unemployment rates persisted alongside the depressed economy. Many states that relied upon federal assistance to help with unemployment insurance now must pay the federal government back. It’s yet another example of how borrowing money against future tax revenues has undercut states’ ability to fund key services—such as job training.
Fate of the States: The New Geography of American Prosperity Page 11
