Options are limited for state governments during a deleveraging period throughout the entire developed world. Because states do not have a central bank to manipulate monetary policy in order to stimulate consumer spending and growth, state governments are left with two basic options, cut spending or increase revenues by increasing tax rates. In the climate of the United States increasing revenues by increasing tax rates is a high risk move because of the competitive business environment where companies can easily move their business from state to state in search of the most favorable tax structures. When a state loses the headquarters of a profitable business they lose the tax revenue of the business as well as the tax revenue of the company's employees.
When this macro structure is applied to the state of Wisconsin it is easy to see that Governor Scott Walker and his administration chose the decreased spending option. Walker is attempting to walk the fine line of not eliminating public sector jobs while cutting benefits for jobs that have theoretically been saved.
Choosing to balance the budget via increased contributions from public sector workers was a strategy that the Walker administration knew would cause a tremendous backlash, but a backlash that they could ultimately withstand. They believe the fight needed to be fought eventually. And if the fight is fought and won the victory would carry behind it years of political stability.
Both sides in the Wisconsin debate are demagoguing the issues and demonizing the opponent in a way that is unlikely to create the climate for a level headed discussion. Republicans have demonized state workers as greedy and self centered. What is more likely is that state workers, much like most humans have a sense of self preservation and are fighting cuts that have a real impact on their day to day finances. While Democrats are claiming that increased revenues could solve all of the State's debt problems but it would more likely cause a mass exodus of corporations and businesses that make up a substantial portion of the State's tax base and offer a large percentage of the State's employment opportunities.
The likely outcome in Wisconsin and on a larger scale the country is not a compromise but gridlock, nasty political battles and transfers of power between the left and right during the deleveraging. The result of this political battle much like has already happened to the United States as a whole, is that Wisconsin's credit rating will be downgraded. Therefore it will become more and more expensive for Wisconsin to finance its debt and eventually Wisconsin will go the way of Greece and be forced to live within its means. To be blunt if it reaches that point, the cuts will have to be painful and drastic.
The dirty secret in the budget debate in Wisconsin is that the public debt is not the only problem, yes it is the problem that the State government has the power to directly address, however private sector debt also plays a key role in the deleveraging and it will continue to play out in Wisconsin and around the developed world for the next several years.
Ultimately the blame for the budget imbalance can be laid at the door of the large institutions that created the housing bubble and related mortgage backed securities fraud. Unfortunately there is currently no way to extract funds directly from those banks and inject them into the Wisconsin state budget. Any money coming from Washington is coming from the printing presses and not from lending institutions which only compounds the problem.
About the Author: William is a freelance writer based in Milwaukee. His areas of focus include politics and economics.