Paul Krugman has a good column today about how state balanced budget needs lead to perverse outcomes during an economic crisis that demands fiscal stimulus.
But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers - state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation's economic future.
These state-level cutbacks range from small acts of cruelty to giant acts of panic - from cuts in South Carolina's juvenile justice program, which will force young offenders out of group homes and into prison, to the decision by a committee that manages California state spending to halt all construction outlays for six months.
As Krugman notes, it's crazy to cut public spending at the same time that private spending is drying up. It's a recipe for a Hoover-esque depression with no investment or economic activity, and no way to increase consumer spending or create jobs.
Krugman acknowledges that balanced-budget rules are only a part of this problem in the states.
The answer, of course, is that state and local government revenues are plunging along with the economy - and unlike the federal government, lower-level governments can't borrow their way through the crisis. Partly that's because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren't, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.
Are governors responsible for their own predicament? To some extent. Arnold Schwarzenegger, in particular, deserves some jeers. He became governor in the first place because voters were outraged over his predecessor's budget problems, but he did nothing to secure the state's fiscal future - and he now faces a projected budget deficit bigger than the one that did in Gray Davis.
That's absolutely true. And the suffocating 2/3 requirement is most of the problem here. But once we get out of this crisis, hopefully with some assistance from the federal government for Medicaid and public works, we need to think a little more creatively about how to reduce the risk of a state's fiscal trap on the greater economy. One idea is allowing state governments the ability to deficit spend, perhaps through the creation of some federal Stimulus fund that states facing certain deficits can tap. This is the framework behind the National Infrastructure Bank proposed by Sens. Dodd and Hagel last year, but I would broaden it out. There's also the option of federal guarantees for state bond markets to increase investor confidence, or allowing states in a fiscal emergency to borrow at lower federal rates in the short term. These are steps similar to those being used to bail out banks, with the Fed intervening in the commercial paper market, and they should be tools for the states as well.
With structures like this in place, just maybe we can phase out the balanced budget amendments that force these bad choices on the states. Ultimately, California can't ask for help until they help themselves. The bond market will simply not improve until investors are assured that the state can manage its own affairs. But after the failed Schwarzenegger Administration, the next governor should think seriously about giving the state flexibility in an economic downturn, rather than going along with the necessary steps to making things measurably worse.
Not content with denying to Californians the numerous tangible benefits of high speed rail, Prop 1A opponents have retreated into a revival of Herbert Hoover's economic policy in order to try and defeat the most important project Californians have considered in nearly 50 years. Their argument is that in an economic crisis, we should turn to austerity instead of following the tried and true path of deficit spending on infrastructure that provides short-term job relief and long-term economic value.
Today we have numerous articles and media outlets starting to push back against the New Hoovers. From newspaper editorial pages to leading economists there is a growing consensus that we must use deficit spending - in our case, bonds - to spur economic growth through infrastructure projects.
Conservative Financial Times columnist Samuel Brittan said the fears that short-term stimulus spending by governments will raise deficits miss the point. Even the $700 billion Wall Street rescue plan approved by the U.S. government - part of a more than $2 trillion international bailout of banks by governments around the world - does not change the equation.
"Maxims about debt that might be prudent for families can be the height of folly for government," he wrote.
British economist John Maynard Keynes is credited with the basic insight, arguing that the Great Depression was prolonged because Western governments insisted on balancing budgets, raising taxes and cutting spending at a time when private economic activity had ground to a halt.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan research group, said both candidates must put together a credible long-term plan to deal with the exploding deficit, but that the government should be priming the pump in the short term.
And to provide that help, we're going to have to put some prejudices aside. It's politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold....
All signs point to an economic slump that will be nasty, brutish - and long....
And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn't needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let's get those projects rolling.
The growing unanimity of opinion on the need for deficit spending for infrastructure projects is striking. Krugman, MacGuineas and Brittan join leading economic figures like Nouriel Roubini and Lawrence Summers in calling for bold action to mitigate the deepening economic crisis.
Arnold Schwarzenegger has finally managed to bring people with differing viewpoints together to agree in a post-partisan fashion. See, nobody likes his revised budget plan, as Bob Salladay reports. Conservatives think that it doesn't go far enough, spends too much, and relies on too many shaky budgeting gimmicks, like privatizing the lottery for a short-term cash infusion. Democratic leaders have rightly called it mean-spirited and cruel for slashing aid to the poor and cutting public transit funding, among other things. The state's pundit class has sneered at the cynical nature of saying that you could balance the budget responsibly to begin with. And the Legislative Analyst's Office, who are supposed to play it right down the middle, criticize the revision as well.
The state of California is not generating the revenue that they expected. This is clear and it's been known for some time. The original budget that the Governor proposed, based on those sunny estimates, is obsolete. In order to balance the budget, spending will have to decrease or revenue increased. We know what choice the Republican will make.
Gov. Arnold Schwarzenegger is likely to call for state spending cuts beyond those he proposed in January when he presents a revised budget to the Legislature next week, administration officials said Tuesday [...]
In January, Schwarzenegger outlined a $103 billion general-fund budget for the 2007-08 fiscal year and proposed balancing it by withholding cost-of-living increases for welfare recipients, cutting welfare payments to children whose parents fail to comply with work requirements, and reducing aid to the homeless, among other things.
The cuts to welfare will remain in the budget the Republican governor is slated to unveil on Monday, Palmer said. That could set up a showdown with Democratic lawmakers, who have made it clear they oppose reducing the social safety net for children.
