Fiscal instability is not only an issue nationally - driven largely by health care spending - but at the state and local levels as well. A new GAO report illustrates the magnitude of the fiscal challenges facing states, and identifies the (unsurprising) culprit:

The [simulation] show[s] that [state and local] health-related costs will be about 3.8 percent of GDP in 2013 and 7.2 percent of GDP in 2060...[t]he model projects that the [state and local] non-health-related costs will be about 10.5 percent of GDP in 2013 and about 7.7 percent of GDP in 2060.

The ever-growing burden imposed by health care spending means that, by 2060, the national state and local fiscal gap will be around 4 percent of GDP - in nominal terms, that's about $5 trillion based on CBO projections. Because health care costs - enshrined in promises to government employees and retirees, as well as Medicaid spending on the poor - will drive this growth, which is unlikely to slow down (health care spending on current employees and retirees is governed by contracts, which makes it difficult to pare back; Obamacare's Medicaid expansion ensures that, in the states that undertake it, many more residents will be covered making it more difficult to slow down its growth) other state and local outlays will fall on the chopping block. This phenomenon of "crowding out" is nothing new; because localities operate with limited funds (revenue must be raised through taxes, bond issuance, or from federal grants), each slice of the pie has to get smaller.

Indeed, the GAO report also acknowledges that wages paid to state and local employees will likely fall as a share of GDP (this phenomenon may ironically increase retirement promises that localities make to employees).

Not even Stockton city officials dispute the cause of the San Joaquin Valley city's fiscal problems: unsustainable benefits secured by public-sector workers and other poor spending priorities. Councilwoman Kathy Miller, on the stand at the bankruptcy trial held at the Sacramento federal courthouse, was questioned about a video she produced last year detailing the city's "Lamborghini" health benefits. It's crazy, really. City workers and their families had free lifetime medical care with no co-pays or contributions. Stockton officials ended that scam, but they only slightly and temporarily rolled back excessive compensation and they are not even trying to address the ongoing pension debt. If Stockton is allowed to stiff bond holders and leave the California Public Employees' Retirement System alone, then every hard-pressed municipality can continue to crank up retirement benefits and stick it to Wall Street. I attended part of the trial yesterday, then headed to Stockton to check out my rental properties there. When I got home, in the mail was another fee for those properties -- a $165 self-inspection fee to make sure one of my well-kept homes there meets city standards. Meanwhile, the city can't even come close to maintaining its public spaces because it has so overpaid its employees that it has to cut back everything. Welcome to the public sector where the employee is king.

Most people probably think of America's Red States--where people cling to their guns and religion and clamor for lower taxes--and the Nordic countries--the pacific, secular home of social democracy where people assemble their own furniture and listen to Abba--as antithetical. But there are some interesting connections...