Here’s the Next Crisis
When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures.
Strangely enough, every easily foreseeable financial crisis is presented in the mainstream media as one that “nobody saw coming.†No doubt the crisis visible in these three charts will also fall into the “nobody saw it coming†category.
Take a look at this chart of state and local government debt. As we noted yesterday, nominal GDP rose about 77% since 2000. So state and local debt rose at double the rate of GDP. That is the definition of an unsustainable trend.
As noted earlier in the week, state and local taxes have soared 75%. While this would be no big deal if wages and salaries had risen by 75% in the same time frame, but earnings have barely kept pace with inflation (38% since 2000).
So state and local taxes have risen at a rate twice that of wages/salaries. State and local governments can keep raising taxes, but where’s the money going to come from?
State and local government expenditures have risen faster than inflation or GDP.
Here is the context that matters: household income. This is median real income, i.e. adjusted for inflation.
Wages and salaries are barely keeping up with inflation, real household incomes are down 8.5% since 2000 and state and local government taxes and spending are rising at twice the rate of inflation–where does this lead to?