What Really Matters for State Budgets

Wisconsin's showdown over public sector unions is the launching pad for a wider debate about whether unionized government workers are bad for state budgets. You'd think higher paid state employees means more state government spending, which in a recession correlates with higher state budget shortfalls. But political scientist John Sides plots the relationship between state budget shortfalls and public union density and finds the correlation is nil.



This is an interesting if insignificant finding, as Mike Konczal writes, because public unions are an insignificant gauge of budget health nationwide. There are many roads to moderate budget health. For example, conservative governors of low-income, right-to-work southern states (WV, AL, MS) tend to have low public sector workforce, low overall spending, unfrothy bubble-era economies, and moderate budget crises today. Yet higher-income, more heavily unionized northeastern states (NY, PA, MA, RI) have the same moderate budget crises because they have strong economies and resilient tax income.

But look what happens when Konczal plots the relationship between state deficits and housing weakness (as approximated by the percent of homes in or near negative equity)...

Weak housing makes weak budgets. And an imploding local real estate market hurts both home prices and income-generating businesses that send taxes to City Hall.

For all the talk about unions and pensions, it's also important to look at underlying fundamentals. For example, Virginia has enjoyed pretty sound budgeting for the last few decades, but in the recession it also benefited from the proximity of Washington, which kept its defense and technology industries afloat when the recession was demolishing the rest of the economy. West Virginia has seen coal exports rebound to record levels since 2008. Budget decisions are important, but sturdy economic foundations make the job a lot easier. Where the foundations turned out to be a real estate market made of sand, that's where states got into trouble.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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