States Against the Recovery
A thought-provoking article from James Surowiecki at the New Yorker:
Think about the $787-billion federal stimulus package. It’s built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.
Now, state cutbacks have not been as severe as they might have been, thanks to the stimulus plan, which includes roughly $140 billion in aid to local governments. That aid, according to a recent study by the Center on Budget and Policy Priorities, has covered thirty to forty per cent of the states’ budget shortfalls. Money for the states translates directly into jobs not lost and services not cut—which is why you can make a good case that more of the stimulus should have gone to state aid. Yet there’s no sign that those budget gaps are getting smaller, and, as the federal money runs out, state tax increases and spending cutbacks are only going to become more common. In the midst of this downturn, some of the biggest players in the economy—state and local governments together account for about thirteen per cent of G.D.P.—will be doing precisely the wrong thing.
This is the season to lament the lack of foresightedness of our elected officials – at the peak of the real-estate bubble, it would have been a trivial matter to build up a large enough surplus to weather the 2009-2010 budget cycle. And cooling down market speculation and the growth of exotic financial products (which padded the capital gains line on so many Connecticut tax returns) might have actually had a beneficial effect on our present economic situation.
Now, of course, tetchy Fairfield County Democrats are protesting tax increases – not because they’re wrong for this moment (which they are), but because they have the prospect of “growing the size of government” after the crisis has passed. Which just goes to show that the people who didn’t show foresight before a crisis aren’t going to produce a thoughtful structural reform in the middle of one.
An aside: I recognize the economic argument that the middle of a recession is the wrong time for anything that slows economic activity, and both cuts to services and increases in taxes qualify. But our electeds didn’t plan ahead, so the genie’s out of the box – and since we continue to experience a widening inequality gap in the state, increases on stored wealth and millionaire-level incomes is less harmful than the alternative.
So what is there apart from tax increases, service cuts, or “help us, Federal government”? The old plan contained about 18% borrowing and rainy day funds, which are the two most promising alternatives. Another idea, the introduction of a ten-year budget cycle would have forced long-term thinking into the process, but the bill didn’t go anywhere with only two speakers (neither of them elected) testifying in favor at the public hearing in March. But one piece of the testimony is relevant to this discussion:
SEIU supports this resolution, because we believe that increasing the budgetary sets could have a profound effect on the ability of the State to deal with an economic downturn such as the one we’re currently in. The current model leaves little room to maximize the effect of the federal stimulus package, as the money that is coming in is used to fill existing budget holes as opposed to increase spending, which is the intent of the stimulus package. (Inaudible) theory would suggest that to get the economic recovery kick-started, the federal money would have to have a multiplier effect, and once again, under our current budget and system, it just isn’t allowable.
If you look at — Paul Kruegmann (inaudible) had written on December 28 that we have 50 Herbert Hoovers in looking at the governors. And he said, “But even as Washington tries to rescue the economy, the nation will be reeling from actions of 50 Herbert Hoovers, state governors who are slashing spending in a time of recession, often at the expense of both their most vulnerable constituents and the nation’s economic future.” So we believe that this proposal has the ability to fundamentally change how government is run in this state and that it should at least be moved out of this committee and continue to be looked at.
As a question of principle, I wonder what our Governor and legislative leaders would say about enacting this idea through the back-door as part of the budget negotiations by simply bonding the deficit amount, or even scaling back taxes for the current and upcoming fiscal years by bonding a portion of the budget that would be covered by current revenues. There’d wind up being a penalty associated with the move (interest isn’t free), which is why bonding operating expenses is generally frowned upon – but I wonder if that might not be the least-worst option at this late stage. Bond the deficit amount plus 10%, introduce brackets into the income tax (not as the current rate plus 1% for high incomes, but as the current rate minus 1% for low to moderate incomes), and establish the expectation that the excess of the good years will be salted away to help us make it through the lean years going forwards.
Update: Also of note, whoever our Democratic supermajority has hired to staff the Government Administration and Elections Committee is apparently unfamiliar with the name “Krugman.” There’s a bad sign for you.