Simple answers for a complex problem

The Pew Center recently reported that 10 states - Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island, and Wisconsin - are barreling toward economic disaster. Double-digit budget gaps, rising unemployment, and high foreclosure rates are just some of the reasons. Thankfully, Idaho isn't on the list, and is in better shape overall, but it is not immune.

People who are re-entering the workforce are taking an average pay cut of 40 percent from their previous jobs, estimates Kenneth Couch, an economics professor at the University of Connecticut, based on the experiences of Connecticut residents during the 2001 recession and on other studies during the 1981 recession(1). In the past, Couch said it has taken six years before people were earning an average of 80 percent of their old paycheck with younger workers creeping closer to their old wages more quickly than older workers.

Foreclosure starts, as reported by the Mortgage Bankers Association and other data from the Center for Responsible Lending, indicate that foreclosures in most states will more than triple during the next four years, reaching a total of 8.1 million foreclosures.

Throughout the country, states filled 30-40 percent of their budget gaps for the current fiscal year with federal stimulus money. They were allotted about $250 billion of the $787 billion stimulus package, most of which will be distributed by the end of next year. Without more federal help, state budget cuts will shave nearly a percentage point off the nation's gross domestic product growth. The cuts also will eliminate roughly 900,000 jobs in fiscal 2011, according to The Liberal Center on Budget and Policy Priorities.

"The problems are evident from coast to coast," said Mark Zandi, chief economist for Moody's Economy.com. "Without more help to state and local governments, the resulting budget cuts will become a very significant drag on the economy."

There is a limit on how much the national government can help the states. Our national debt now looms at $12 trillion, and is on track for increasing to record highs as a percentage of gross domestic product (GDP), according to the Congressional Budget Office. They state that our debt to GDP ratio is scheduled to hit 60 year highs at 100.2 percent by 2012, which is nearly double the average percentage during the Clinton and Bush presidencies.

So, how can the country dig out of this hole? Ideally, the best way is to grow out of it based on savings, not borrow out of it. As an entire nation - individuals, states, and the federal government - we all need to live within our means and save for our future, or the problems will only get worse. Our country saw strong economic growth in the 1980's and 1990's only after the average American saved 8-9 percent of their annual income in the 1960's and 1970's and the federal government kept their debt to GDP ratio at closer to 30 percent (less than half of where we are today). When we are all living on average within our means again, our country will once again be able to see strong economic growth, which will help individual states and the country as a whole stop the red ink.

(1) http://www.ombwatch.org/node/1541

Dan Pinkerton is the founder of Pinkerton Retirement Specialists, a private wealth management firm that Barron's ranked as the No. 1 Financial Advisor in Idaho in February, 2010, based on assets managed, years of experience, compliance records, client retention reports, types of revenues and assets advised on, and quality of practice. Registered Rep Magazine ranked PRS as one of the Top 100 in the nation since 2007. Securities offered through LPL Financial, Member FINRA/SIPC. www.pinkertonretirement.com. Contact them at prs@pinkertonretirement.com