State Surpluses Stage Strong Showing in '91

ALL over America, governors and mayors are singing the blues. Taxes are up, spending is capped, and voters are MAD. But a funny thing happened when thousands of jurisdictions faced up to their problems: State and local governments now have a large and rapidly growing budget surplus.

This is good news for taxpayers and for the economy. The fiscal drag from higher taxes and slower spending should soon disappear. As one result, the economic recovery should continue to pick up speed.

Government data show that state and local governments had combined revenues of $795.9 billion in the fourth quarter of 1991, up 7.4 percent from a year earlier, and outlays of $755.6 billion, up 4.5 percent. (All these figures are at seasonally adjusted annual rates.) This produced an overall budget surplus of $40.4 billion, more than double the surplus of $18 billion in the final quarter of 1990. While state and local authorities have indeed bitten the fiscal bullet, they also got a helping hand from Un cle Sam. A major component in the budgetary turnaround was a big increase in federal grants-in-aid, which jumped 19 percent to a total of $163.3 billion.

Solid gains notwithstanding, many economists persist in arguing that Washington should do more. A group of 100 economists (including six Nobel laureates) issued a statement calling for an additional $50 billion in federal aid to state and local governments. Unfortunately, the proposed aid program would force Washington to borrow to add to state and local government budget surpluses that are already rising rapidly.

To their credit, the Group of 100 (mostly left-of-center academic) economists focused on the fundamental long-run problem facing the US: "The prospect is slow growth of productivity and therefore slow growth of incomes.... The remedy for the long-run problem is more investment: in people, in infrastructure, in technology, and in machinery." The group warned Congress that "cutting income taxes is exactly the wrong approach. It would promote consumption, not investment.... Over-consumption is our chronic d isease, not the cure." Education, the statement asserted, has suffered "just at a time when improved and expanded education is widely recognized as an essential key to the future of productivity and competitiveness of Americans."

That sounds good. But according to John Chubb of the Brookings Institution and Terry Moe of Stanford, in 1991 real education outlays per pupil were roughly four times what they were in 1950. Yet in the 1950s, with outlays only a quarter of the present level, the nation achieved sustained growth in productivity and real income per worker that was several times higher than it accomplished in the 1980s and 1990s.

While additional outlays for education may be unavoidable, throwing money at the school system is not the answer. Since the 1950s, the share of the education dollar that goes to instruction has dropped, while the share for "administration" has gone up. In New York City, the average pay for a school janitor is higher than the top pay for a teacher. Nationally, billions of dollars are wasted on bilingual education that traps young people in non-English-speaking ghettos and condemns them to poverty. Educati on's problem is a lack of productivity, not a lack of resources.

In fact, regardless of race, ethnic background, or class, teenagers are in deep trouble. The 27 percent hike in the minimum wage in 1989 and 1990 played a key role in cutting employment of young people by more than 20 percent in the last three years. This is a societal disaster, which deprived almost 2 million teenagers of the work experience that is vital to the passage from childhood.

The Group of 100 made an excellent case for increasing public and private investment. While the goal is desirable, their recommendations are wrong. It makes no sense to increase the federal deficit to run even bigger state and local surpluses. If the Group of 100 really wanted to boost the economy, it would have recommended the repeal of the minimum wage and the firing of large numbers of school administrators.