State and local governments: budget cuts likely

As the housing bubble pops, one major casualty is likely to be state and local government property tax receipts. It appears that state and local governments recklessly spent the windfall revenue that they received during the boom times and have been caught out now that the boom has turned to bust.

Not a day goes by without commentary in the newspapers or online about severe budget cuts in one municipality or another. The State of California and the City of New York are leaders among those governments likely to suffer severely during this downturn.

The question then becomes: what can we expect as taxpayers in terms of services for our hard-earned tax dollars? Charles Hugh Smith has an excellent blog on this very topic. My understanding is that much of the State and local budget is mandated and hard to cut. Therefore, cuts will occur in areas of greatest leverage: infrastructure — both human and transportation. It is a safe bet that we will get less in infrastructure and education, in particular. After incidents like the Minneapolis bridge collapse, we all know that our governments have continued to under-invest in infrastructure despite boom times. Now that revenue for local and state governments has fallen, it is to be expected that infrastructure projects will be even less likely going forward.

I expect many municipalities to enter bankruptcy. Others will be forced to make major cuts to stay viable and avoid bankruptcies. So, a likely outgrowth of the housing bubble is a decaying infrastructure and poor education. For those of us who can think of historical parallels, the United Kingdom after World War II is an apt one. There, decades-long under-investment after the crippling war left the country’s roadways and education system in a shambles from which it is still recovering over 60 years later. It wasn’t called the ‘Sick Man of Europe’ for nothing.

Let’s hope the United States does not suffer the same fate.