Why Your State Cannot Print Money the Way Washington Does

Imagine a governor walking into a press conference to announce that the state is eighty million dollars short, so the state will simply run a deficit, borrow against next year, and move on. The reporters would not report a policy. They would report a resignation. In most states, that sentence is not a policy option; it is a violation of the constitution.

Now imagine the same announcement from Washington, where a deficit is not a crisis, it is a lifestyle. Congress has run a deficit in every year since 1970 except four, and nobody has to resign, because nobody in Washington has to balance anything. Why can one government do what the other cannot? And what should a family that pays taxes to both governments learn from the difference?

My argument is simple. The discipline your state lives under is not a quirk of bookkeeping. It is a rule that forces honest choices, and it is a free civics lesson in what a federal budget would look like if Congress played by the same rules. But the rule is not perfect, and the strongest objection to it deserves a real answer. Let's go through it.

Why Washington is different

Start with the structure. Article I, Section 10 of the Constitution says that no state shall "coin Money," "emit Bills of Credit," or "make any Thing but gold and silver Coin a Tender in Payment of Debts." A state cannot issue its own currency. It cannot declare that its IOUs are legal tender. It cannot, as a matter of constitutional law, pay its bills by manufacturing dollars.

Washington lives in a different world. The federal government issues debt denominated in the currency it controls, a currency the rest of the world has wanted for generations, and it has a central bank, the Federal Reserve, with tools that affect the cost and supply of money. Nothing in the Constitution requires a balanced federal budget. A state is a borrower like any other borrower. Washington is a borrower who also writes the rules of the money.

There is a second difference that people forget. A state cannot file for bankruptcy. Cities and counties can use the federal Bankruptcy Code's Chapter 9 in some circumstances, but a state is not eligible. A state that cannot pay its bills has no legal refuge, which means its creditors, its employees and its citizens have a very strong reason to demand that it pay what it owes.

The lesson of the 1840s

The balanced-budget habit in the states did not come from a textbook. It came from a disaster. In the 1830s, states borrowed heavily to finance canals, railroads and banks, expecting that the projects would pay for themselves. When the Panic of 1837 and the depression that followed hit, revenues collapsed, and several states defaulted on their bonds or came close. Congress considered whether to take over the states' debts, and it declined. The states were on their own.

The reaction is one of the most important chapters in American public finance. In the 1840s and after, state after state amended its constitution to limit debt, to require voter approval for borrowing, and to demand that spending match revenue. Those provisions are the ancestors of the balanced-budget rules that most states live under today. The states learned the lesson the hard way, and they wrote it down.

How the rules work

Rules vary a great deal, so check your own constitution and statutes. But the common pattern has four parts.

1. A balanced operating budget. The governor must propose, or the legislature must pass, or both, a budget in which planned spending does not exceed expected revenue. In some states the requirement is in the constitution. In others it is in a statute. In some, it applies only to the governor's proposal. In a few, it applies to the enacted budget and even to the books at the end of the year. The details matter, and they are the reason one state's rule bites hard while another's is flexible.
2. A separate capital budget. Operating spending, like salaries, programs and daily upkeep, has to be paid out of current revenue. Capital spending, like a highway, a bridge or a university building, can be financed with bonds, because it lasts for decades and the people who benefit will be paying for it for decades. The usual limits are a cap on debt, a requirement of voter approval or a supermajority vote, and a rule that bond proceeds go only to capital projects.
3. Rainy-day funds. Many states set aside reserves in good years to cover revenue shortfalls in bad ones. The details differ: how much goes in, when it can come out, and how much political will it takes to leave it alone.
4. Consequences. In many states the governor has the power to cut spending mid-year if revenue falls short, or the legislature must come back in special session to close the gap.

The most important idea is the difference between operating and capital. A family does not borrow to buy groceries, and it does borrow to buy a house. The state rules draw the same line. The line is not always clean, and politicians know how to stretch it, but it exists.

The gimmicks

No rule survives contact with a legislature that wants to spend more than it has, and the history of state budgets includes a catalog of ways around the rules. Here are the most common ones.

• Delaying payments. Push a bill, a payroll date or a payment to schools into the next fiscal year, so the current year looks balanced. The bill still comes due. It just lands on the next legislature.
• One-time money for recurring costs. Sell a state building, take a one-time legal settlement or tap a special fund, and use the proceeds to pay for something that repeats every year. A hypothetical makes the problem obvious: if a state sells an office building for $500 million and uses it to cover $500 million in annual payroll for a program, the budget balances this year. Next year the building is gone, the payroll is not, and the hole is $500 million deep.
• Rosy revenue estimates. If the budget has to balance on paper, a legislature can balance it by assuming the economy will do better than any forecaster expects. Nobody breaks a rule. The estimate is just optimistic.
• Borrowing from special funds. Move money out of a road fund or a pension fund, promise to pay it back, and spend it. The IOU is just another form of debt.
• Skipping pension contributions. Pay less than the actuaries say is needed to cover promised benefits. The budget balances, and the shortfall grows in the background.

Every one of these tricks has the same shape. It makes this year's budget look balanced by pushing a cost into a year when someone else is in charge. The right test for any budget is to ask: if the economy stays exactly the same, would this budget balance next year? If not, it is not balanced; it is postponed.

The numbered argument

Here is the case, in order.

1. A state is a borrower, not a monetary authority, and it has no bankruptcy court to rescue it. So it has every reason to avoid debts it cannot repay.
2. A balanced-budget rule forces visible choices. If the legislature wants a new program, it must either pay for it with a tax, cut something else, or persuade voters to borrow for a capital project. Each is a choice that can be debated.
3. Rules that bind politicians help citizens, because a promise to be disciplined is easier to keep when the constitution keeps it for you.
4. The federal government faces none of these constraints, and it behaves accordingly. Its choices are less visible, because the cost of a deficit lands on future taxpayers who cannot vote yet. Our piece on twelve questions about the national debt, answered straight answers the questions families ask about that.
5. The practical lesson: if states can live under a balance rule and still build highways and fund schools, Congress could live under a similar one. Whether a federal balanced-budget amendment is the right tool is a separate and honest debate. Such an amendment passed the House in 1995 and fell short in the Senate. But the state experience shows the idea is not fantasy.

Something else belongs in the case. When the federal government is willing to print and borrow without limit, the bill eventually shows up in prices. We explain that connection in Inflation is the one tax that never needs a vote in Congress.

The strongest objection: balanced budgets make recessions worse

Now the other side, at its best. During a recession, tax revenue falls and demand for services such as unemployment benefits and Medicaid rises. A state with a balanced-budget rule must cut spending or raise taxes at exactly the wrong moment, which drains money from the economy when it needs it most. Economists call this procyclical policy: it makes the cycle worse. This is why, in 2009, Congress passed the American Recovery and Reinvestment Act, which included money to help states fill gaps in their budgets. Without that aid, critics argue, states would have cut deeper, laid off more teachers and made the downturn longer.

I take this seriously. It is true that a balanced-budget rule can force painful cuts in a downturn. It is a real cost. But there are three answers.

1. The cure is reserves, not deficits. The purpose of a rainy-day fund is to let a state cover a downturn without gutting services. A hypothetical makes it concrete. Suppose a state with a $40 billion budget builds a reserve equal to 10 percent of the budget, which is $4 billion. If revenue falls 5 percent in a recession, the shortfall is 0.05 × 40 = $2 billion a year. The reserve covers two years of that shortfall (4 ÷ 2 = 2). A state that saved in good times can ride out a recession without cutting a teacher or raising a tax. A state that spent every dollar in the boom cannot, and the rule did not fail it; its own choices did.
2. A rule that bends in every recession is no rule. If the balance requirement is waived whenever times are hard, it will be waived whenever someone says times are hard. Discipline that disappears when it is needed is not discipline.
3. Federal rescue comes with strings. Aid to states arrives with conditions, and the conditions change what states do. The Supreme Court recognized limits on that kind of leverage in NFIB v. Sebelius (2012), which we discuss in NFIB v. Sebelius Lost the Mandate Fight but Won a Limit on Federal Strings. A state that builds its own reserves keeps its own decisions.

My verdict is that the objection identifies a real weakness, and the right response is to strengthen the saving, not to scrap the rule.

What your state's budget teaches the rest of us

If you want to see how this plays out in practice, look at how Colorado voters drew their own line on spending, in How Colorado Voters Put a Leash on Their Own Legislature, and at how the choice between income taxes and sales taxes shapes how stable a state's revenue is, in Income Tax or No Income Tax, and What Each Choice Costs a State. For the federal side, How Washington learned to budget, from the 1921 act to the 1997 deal shows how Congress built its budget process, and what a government shutdown really shuts down and who gets paid shows what happens when it fails.

The big picture is this. A balanced operating budget is a promise a government makes to its citizens: we will not spend your children's money to buy your votes this year. The promise can be bent, and the gimmicks are real. But a government that has to keep the promise looks very different from one that does not.

The bottom line

• A state cannot print money, declare its debts legal tender, or file for bankruptcy. That is why nearly every state has a rule to balance its operating budget, and why those rules came from hard experience.
• Know the difference between operating and capital spending, and watch for the gimmicks: delayed payments, one-time money for recurring costs, rosy estimates and skipped pension contributions.
• The best answer to the recession objection is a real rainy-day fund. Ask your legislators how large yours is and what it takes to spend it.
• When you hear that Washington cannot balance its books, remember your state does it every year. The question is whether Congress wants to.