I think he just might be. At the Annual Meeting of the Southern Legislative Conference of the Council of State Governments in South Carolina, he argued in favor of States setting up “reserve – or ‘rainy day’ – funds”. In his own words:
“Tools exist to help mitigate the effects of the business cycle on state budgets. Many states deal with revenue fluctuations by building up reserve–or “rainy day”–funds during good economic times. Measured as a percent of general fund expenditures, the aggregate reserve fund balances for all state governments stood at a record of about 12 percent at the end of 2006; the states represented by the SLC had accumulated above-average reserves of around 16 percent. These high reserve-fund balances were helpful in lessening the severity of spending cuts or tax increases in many states. Nevertheless, given the depth of the recent recession, even these historically high reserve-fund balances proved insufficient to buffer fully the budgets of most states. Thus, state governments may wish to revisit their criteria for accumulating fiscal reserves. Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times.”
As best I can tell, Alaska, Alabama, New Mexico, Oklahoma and Wyoming all have the types of rainy day funds that Bernanke is talking about. And these funds have undoubtedly helped these states to cushion the blow of the GFC. But, even so, it seems an odd time to raise the idea in front of the Council of Governors — the horse has already bolted! The states don’t have any chance (at least in the short- to medium-term) of building up this type of a reserve fund. And, while I think these stabilization funds do have merit (in certain circumstances), the poor timing of this suggestion appears to be driving a negative reaction among some pundits, such as Mike Shedlock:
“Bernanke’s warning regarding what states should have done a decade ago sure is “timely”. It is also disingenuous. He now wants states to save more, but not make spending cuts. When does this start? Now? Of course not. It might wreck the nascent recovery…”
And there are plenty of other skeptics. For example, Ezra Klein of WaPo has a fair point:
“…you wouldn’t want states budgeting for once-every-80-years economic storms. That’d mean keeping a lot of cash sitting around that could be more productively used for other things.”
I think, in general, Klein’s point is right. But it really depends on a lot of factors, such as whether the states can be sure they have the backing of the Federal government or that they will have access to debt markets in times of crisis. Because if the alternative is a bunch of states melting down every 80 years, then perhaps Bernanke has a point. In addition, the states should consider whether the loss of autonomy to the Federal government (or to whomever steps in to bail them out) during these times of crisis is something they can live with (think of IMF conditionality here), as this issue of “sovereignty” has underpinned the spread of SWFs among nation-states.
Anyway, it’s a lot to think about…and given the current fiscal position of state governments, I think we’ve got plenty of time.