Friday, June 3, 2016

Unsustainable luxury versus sustainable frugality

An interesting example of how the same information can be viewed multiple ways to different effects. From Best-Run States Are Heavily Republican, Study Finds by John Merline.

At the beginning of the week, The Mercatus Instititute produced a report, Ranking the States by Fiscal Condition by Eileen Norcross and Olivia Gonzalez. I like maps, I am interested in government finance, I read the article.
A new study for the Mercatus Center at George Mason University ranks each US state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen­sions and healthcare benefits. This 2016 edition updates the version the Mercatus Center pub­lished in 2015. Using the approach pioneered in 2015, the 2016 edition presents information from each state’s audited financial report in an easily accessible format, this time including Puerto Rico to provide a benchmark of poor fiscal performance.

Growing long-term obligations for pensions and healthcare benefits continue to strain the finances of state governments, highlighting the fact that state policymakers must be vigilant to consider both the short-term and the long-term consequences of their decisions. Understanding how each state is performing in regard to a variety of fiscal indicators can help policymakers as they consider the consequences of policy decisions.
Here is the accompanying map.

In perusing the map, it is easy to see an obvious pattern. States with the best finances tend to be more conservative and traditional. The states whose financial precariousness routinely put them in the news (New Jersey, California, Connecticut, Illinois, etc.) have deep histories being run by liberals and Democrats. No particular new news there, just a bit of visual confirmation of an established knowledge.

Merline takes exactly the same data and punches home the message in a far more striking and therefore effective way. Partly its his punchy headline - Best-Run States Are Heavily Republican, Study Finds. Partly it is his presentation of the data. In addition to the map, he uses a table to show the ten best run and ten worst run states, along with their political affiliation.

I think the issue is much more complicated than Merline's presentation suggests. Defining Best run states solely in financial terms is probably too limiting. Best should presumably include other factors including, for example, morbidity, mortality, labor force participation, education attainment, etc. That said, the list might not change all that much with those other factors included.

My primary point though is that Merline provides an interesting example of how the same information can be used so effectively to make a point simply by changing how the information is presented.

The other take away I had from the original Mercatus article is about sustainability. Forget the partisan issue about who manages state finances the best. Think of this in terms of sustainability. Which states are best positioned to absorb unanticipated shocks or to continue their current lifestyle into the future?

The Mercatus map is not just showing which states have the best financial position. It also shows which states are best positioned to sustain their current lifestyle and policies.

This goes to a deeper point that I see all the time when people are arguing for and against policies or strategies. It is very easy to take an issue at a point in time and point to just how well it is working without ever examining whether it is in fact sustainable over time. The Sweden I grew up in the early 1970s had extremely generous social policies ranging from work to family to school and beyond. It worked, to a degree, substantially because Swedes are highly productive individually and collectively and because Sweden was culturally homogenous.

That 25 year period of prosperity (post war economic boom) was unsustainable. Sweden (and the other Scandinavian social democracies) fell on hard times when the "free" money of boom times dried up. There were currency runs, budget cuts, etc. The Scandinavian countries are still wonderful places but looking at their social policies compared to the utopian sixties and seventies, they seem almost right wing.

It is similar in California, New York, Connecticut, Illinois, etc. It is easy to look good so long as you are borrowing against future anticipated productivity increases to cover your current consumption. You can add museums, libraries, generous pensions, healthcare, vanity construction projects, etc. But if, at some point, people stop lending because they cease to believe that the future productivity increases will occur, then the bubble bursts.

Looking good on borrowed money is a fleeting vanity. Living frugally within your means can seem small minded, constrained, unimaginative, risk averse but it is viable. The latter strategy is sustainable whereas the former is not.

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