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States of Denial

California has drawn national attention for a proposal to raise fees at the state’s renowned universities and for Gov. Arnold Schwarzenegger’s push to divert money from prisons to schools. Yet California is far from the only state forced to consider such measures because of declining tax revenues. Consider this: Every state save Montana and North Dakota is facing a fiscal deficit, and over the next two years the cumulative gap is projected to reach $350 billion. The challenges confronting legislators are made all the more complex by state constitutions that mandate a balanced budget and by the drying up of federal stimulus money.

In most states, tax increases are not being considered, either for reasons of principle or practicality. In Oklahoma, where lawmakers face an 18-percent shortfall, a tax hike can be approved only by a voter referendum or a super-majority of the legislature. In Idaho the Republican governor has vowed not to increase the size of state government and has instead proposed a 4-percent cut in education spending. To deal with its budget gap, Arizona is expected to close 13 state parks, and Iowa legislators are considering a government reorganization bill that would cut off funding to 11 juvenile detention centers.

Another round of stimulus money could temporarily solve the states’ budget woes, but that politically unpopular solution is unlikely. A more radical solution seems called for: a fundamental rethinking of the costs of citizenship. For too long the mantra of low taxes—small government has fed the chimerical idea that the social services we all rely on can be sustained with little personal financial sacrifice. It appears the day of reckoning is at hand.

Does Ben Bernanke Get It?

The chairman of the Federal Reserve Bank, a highly trained economist with expertise in the Great Depression, may have helped to save the world economy from total meltdown last year. True, Ben Bernanke made some colossal blunders—for example, helping to engineer the plan to lavish pots of money on banks without any marching orders other than to “spend it.” They did, but not where it counts: in loans to average Americans. Still, Mr. Bernanke’s smarts probably helped avert an even greater financial catastrophe. But smart or not, it was dispiriting to hear Mr. Bernanke, in a speech to the American Economic Association in January, outline the reasons for the economic crisis without once mentioning the Fed’s unique role. He still seems confident in the Fed’s “unparalleled expertise,” as he told Congress in December.

What does the Federal Reserve do? Essentially, it manages the country’s monetary policy by regulating the availability and cost of money (through interest rates) to banks. (This contrasts with fiscal policy, which is driven by government spending, borrowing and taxing.) The Fed was founded in 1913 specifically to combat financial panics and runs on banks. When the economy is overheated, as it manifestly was during the subprime mortgage boom, the Fed could have regulated interest rates to dampen the banks’ ardor for mortgages. It did not. Now some wonder whether the Fed should be brought under Congressional control, a disastrous idea that would tie interest rates to political whims. A better idea would be for Mr. Bernanke to push for immediate reforms in the banking industry, specifically the reinstitution of the regulations of the Glass-Steagall Act, which limit financial speculation by bankers. That would really be smart.

Divided in Gaza

The Egyptian government is building an underground barrier along its border with the Gaza Strip. Its alleged purpose is to prevent the smuggling into Gaza of arms and other prohibited items, like drugs and alcohol, through as many as 1,000 tunnels. But once completed, the underground steel wall may also prevent Gaza’s residents from receiving needed food and medical supplies transported though the existing tunnels between Egypt and Gaza. The present tunnel system thus serves a humanitarian purpose.

An extensive tunnel smuggling operation expanded when the Islamist movement Hamas won the Palestinian elections in 2006. Efforts by border guards to close off the tunnels have largely failed because new ones are constructed as others are shut down. Hamas in effect licenses the tunnels, providing electricity and imposing a tax on smuggled goods. The United States and other Western countries regard Hamas as a terrorist organization.

Made of steel assembled in a jigsaw pattern to make it more difficult to penetrate and extending over 50 feet down into the sand, the six-mile-long barrier is expected to take a year-and-a-half to complete. The U.S. Army Corps of Engineers is assisting in its construction. Early in 2008, the United States gave $23 million in aid to the Egyptian government to stop the use of existing tunnels, which were intended to circumvent Israel’s economic blockade of Gaza after Hamas assumed power. The underground barrier portends increased suffering for the people of Gaza and is a further deterrent to peace efforts.

This article appears in February 1 2010.