Falling state budgets are a drag on the economy

Cuts to state and local governments have been a big factor in the slow recovery from the Great Recession. During the last year, state and local governments have cut 274,000 jobs, about half of what the private sector has added. Meanwhile, federal employment has remained relatively steady, except for a temporary surge of hiring for the census.

As the state with the economy that went from first to worst, Nevada's budget cuts have been pretty deep, though they would have been much worse without federal government aid. In the next legislative session, however, this stimulus money will have run out, and the taxes we implemented in 2009 will expire. While the projected budget gap is only about 1 percent of our state's overall economy, it is almost half of our state's general fund.

Many Nevadans are finally realizing that with gaming and tourism on the decline, we can no longer export our taxes to people from out of state, and we have to find a better way to pay for what we need ourselves. A recent poll found that two-thirds of Nevadans were willing to consider some increases in state taxes to replace these lost revenues.

For a state that has long tended to be suspicious of government, what might account for this turnaround?

One possibility is that it has become obvious to many that Nevada really has a very small government, one that is even smaller than it used to be, and it doesn't provide much in the way of public services.

We rank among the smallest states in our number of state and local employees per capita, particularly in education. We have fewer teachers per person than the average state, but we have the smallest higher education sector in the country. To call us the Mississippi of the west in education does an injustice to Mississippi.

The largest part of the state's general fund budget is spent on supporting K-12 education, which continued to rise as the number of children in the state has increased (even though our support is still behind the average state). The state is obligated to spend more, not less, because it has to make up the difference as the property tax collected by local governments and the Local School Support sales tax revenue have declined.

Spending on human services is the second biggest part of the budget, and this has grown due to rising health care costs and increased caseloads due to the nation's highest unemployment rate.

Together, these two parts make up almost 70 percent of the current general fund budget, up from 60 percent a decade ago. As a result, the decline in the total budget has fallen most heavily on the remaining portions, especially on support for higher education. In Nevada, we treat higher education like a luxury good instead of as an investment.

Those who think any amount of public services is still too much have pointed out that the state budget grew faster than the overall state economy in the first part of this last decade. But take a longer look, and you will find that the state budget has been declining as a share of either our Gross State Product or our Personal Income. Our state's budget was a smaller share of our economy in 2007 than it was three decades ago, and by 2009 it was much lower still. Nevada's government still looks small if you also toss in monies spent by local governments, or the matching monies spent on highways, education and Medicaid that come from the federal government.

Of course, people tend to need more public services in recessions, and so ideally state and local governments should be islands of stability in a turbulent economy. Instead, the requirement for a balanced budget when people are paying less in taxes means cutbacks at exactly the wrong time. Instead of remaining stable, Nevada's state budget has declined by more than our average private income, and this further destabilizes our economy. This not only reduces the number of jobs and the overall amount of spending, but it leads to the loss of the public goods the state provided in the first place, some of which - like education - are crucial to our long run recovery.

• Elliott Parker, Ph.D., is professor and chair of the Department of Economics at the University of Nevada, Reno.