A little-discussed news item is that, as the Great Recession drags on, states are getting crushed under piles of borrowing to continue to pay unemployment benefits. As states run out of money, they begin to borrow from the Federal Government.
Why is this issue important? Because the state will eventually have to repay this borrowed money. We're talking about billions of dollars.
According to the web site Pro Publica, Michigan is the number two borrower of federal funds to pay unemployment benefits (behind California). The negative balance of the state's unemployment fund now stands at $3.429 billion. This negative balance is rising almost exponentially. In December alone, the state paid out $243 million more than it collected in unemployment taxes from employers.
2009's "stimulus" law contained a provision that allowed states to avoid interest payments through 2011, but the bill will eventually come due. The kicker is that higher unemployment taxes on employers will be imposed to attempt to pay this shortage back, but that will just serve to kill more jobs as businesses are saddled with even more costs of doing business.
As the private sector has collapsed under the weight of debt saturation, government has begun to take on the debt load.This won't end well.
The problem is that so many people are now dependent on government handouts, the political will to fix the situation will be almost impossible to come by. The entitlement culture will only be curtailed where there is no other choice. And that may be sooner than we think.
We see our own microcosm of this with the crushing pension costs in Grand Rapids. The city's commission is asking for an income tax increase, 100% of which will go to pay pension costs. And that's just for the first year. They will have to come back to taxpayers to cover the tens of millions more they will need to pay just to keep the pension fund solvent. Let me repeat, just so it's clear. This income tax increase will do nothing to improve or prop up city services. It will go only to pay for pensions.
Multiply this by all the cities in Michigan by all the states in the nation by all the people on federal benefits.
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