Where Bailouts Are Really Needed

As the economy continues to spiral into a relative nosedive, much of the focus of our national discussion has been on bailing out the private sector. Whether it be the financials, the insurance giants, or now the automobile industry, the federal government’s role in providing financial assistance has far exceeded anything we have seen in recent history. And this has not occurred without grumbling and sometimes outright anger from voters and some lawmakers alike.

Conservatives have criticized bailouts because of their ideological belief in a pure free-markets approach, and some liberals have displayed anger because of their preference to instead use a more socialist approach that calls for consumer stimulus and middle-class tax relief. And voters, well they are just upset that their taxes are going directly into the pockets of already over-paid executives (or at least that’s the perception). All in all, most of us are against bailouts. However, there is one sector that has gone somewhat unnoticed and that I think we would all, if we really thought about it, agree needs a bailout of its own: state and local governments.

State governments feel the impact of recessions much like any Fortune 500 company; when things get bad, their revenues fall. And so, states such as California, New York, Rhode Island, Alabama, Kentucky, and Florida, all of which were already experiencing fiscal shortfalls before this economic crisis, are now in more dire situations than ever. And unlike a corporation, whose losses are confined to those directly involved with the company, the impact of a state losing all finances is much more difficult to ascertain.

The first step of such a collapse would look like this: states would cut funding. In order to sustain critical operations, states would have to reduce spending across the board, with some of the first areas to be hit including health care, education, and state aid to localities. But what would be the lasting impact of such reductions? In order to begin to answer that question, let us look at just one of these areas, education.

Our educational system is already grossly inadequate, with American students lagging behind many other developed countries in areas such as math and science. And the impact is that we don’t create a workforce that is able to meet our growing demands, and we don’t produce workers able to compete in the global economy. But for some reason, saying these things doesn’t typically register with the American psyche enough to create change. So, I will instead provide an example. Let us consider Lockheed Martin.

In 2004 the Lockheed Martin Corporation, the largest defense contractor in the world, appointed Bob Stevens as its new CEO. Mr. Stevens took a look at the company around him and what he saw was this: 100,000 of his 135,000 employees were expected to retire in the next 10 years. Of these employees, 70,000 were highly skilled engineers. Mr. Stevens understood this meant that there was a distinct urgency to recruit and replace his highly technical workforce with new, young engineers. But Stevens saw one other thing: a pool of potential replacements sorely inadequate to meet his demands. Simply put, the ranks of American born college graduates were not large enough in the field of math and engineering to replace the outgoing workforce. As a result, and without an increased number of math and engineering majors, Lockheed Martin will be forced to either decrease the amount of employees it uses, or to encourage the government to relax its security standards in order to allow top level clearances to foreign born engineers; effectively reducing our security standards at the exact time when we need to raise them.

If that is not enough, just look at the cost of education. Nowadays, attending college is as much a question of financial feasibility as it is of a student’s academic aptitude. For me personally, the cost of a semester’s worth of textbooks can be as high as $500, and that is just the books. Tuition is a whole different ball game. The annual cost of college tuition at either an out-of-state or private university can far exceed $20,000 per year, and that cost is rising. According to this morning’s article in the Washington Post, this past year “tuition has increased as much as 14 percent in Rhode Island, 13 percent in Alabama, as much as 9 percent in Kentucky, and 15 percent…in Florida’s university system”. California anticipates passing a 10 percent increase in college tuition costs for next year.

And so, when we need to increase the pipeline of college graduates and better train them for an international workplace with increasing competition, we are making college graduation a more costly endeavor than it has ever been. High school graduates must choose between facing a world without a diploma and waiting four years to enter it encumbered with debt. Quite frankly, I can understand why many of them might way the options and choose the former.

The problem is that, unlike the rapid rise in unemployment that would be caused by a GM bankruptcy, or the sudden drop off in stock prices that we would see if another major financial firm went under, the cost of failing to educate our youth would be much slower to show itself. But, while the final result may be slower to materialize, its effects will be far more damaging than anything that can be inflicted by Wall Street or the Big 3 in Detroit.

And this goes for all of the other areas that could see decreased funding. Neglecting Medicaid reimbursements would drastically reduce medical coverage for the poor and the elderly, and increase premium costs for the rest of us who are already overburdened by an overpriced healthcare system. Reduced funding for local municipalities could decrease police budgets to fight crime and address the growing problems associated with gangs, and it also means that infrastructure would continue to be neglected, which might result in further tragedies like the levees breaking in New Orleans and the bridge collapse in Minnesota.

So, while company bailouts are all the fad right now, I only hope that lawmakers and voters remember that we need to not only save the economy for today, but to ensure the stability of it well into the future. And that means paying as much attention to the health of state governments as we do to the state of Wall Street.