Democratic legislative leaders are in Washington today arguing for increased stimulus money for California. I've been arguing that this is required for some time, and hopefully it will be done in such a way that a) it can be applied to the General Fund deficit (so far Arnold has not asked for budget relief in that way) and b) it can be used without up-front money that will be matched, because the cash crisis limits our ability to do that.
However, there is something else that the Obama Administration can do right away to help the bottom line of the state and its citizens, and that is deal with the crisis in the housing market here. It's no secret that California is one of the hardest-hit states by foreclosures; in Stanislaus County, for example, 9 percent of all houses and condos in the county have been foreclosed upon, a staggering figure. That's almost $4 billion dollars worth of foreclosures in Stanislaus alone. In larger counties like San Bernardino and Riverside, you can see how this foreclosure crisis affects new housing starts (there are a glut of cheaper foreclosed homes on the market) and thusly unemployment figures.
Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California's economic powerhouse, accounting for more than a fifth of the state's new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit's as the highest of any major metropolitan area in the U.S.
Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire [...]
With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit's as the highest of any major metropolitan area in the U.S.?
Nobody is calling on the federal government to prop up a sick housing market that will not see a broad recovery for a while. But foreclosures have a disruptive effect on the greater economy. They hurt property values, they hurt banks, and they hurt employment. The crisis is only slated to grow if nothing is done, with homeowners of every income class affected. And so foreclosure aid would be a major boost to California, and it can be done both quickly and effectively. By pledging that $100 billion from the TARP program will go to limit foreclosures, Obama has already begun this effort. Ted Lieu thinks that the Obama Administration understands the nature of the problem. (over)
Five top Democratic governors have called for a larger stimulus package than is presently being called for in Washington, precisely to fill in the gaps created by a loss of tax revenue in the states.
To help offset state budget cuts, a group of Democratic governors urged the federal government Friday to pass a $1 trillion economic stimulus package, significantly larger than the one under discussion in Congress.
The package would help states compensate for cuts to education spending that could cause long-term economic decline, as well as bolster infrastructure projects and benefits programs for the poor, the governors from New York, New Jersey, Massachusetts, Ohio and Wisconsin said in a news conference [...]
The governors recommended that the stimulus plan include $350 billion for infrastructure, including transportation, wastewater and broadband projects; $250 billion for anti-poverty programs such as Medicaid, unemployment insurance, food stamps and child care; $250 billion in flexible education spending to maintain funding for programs from pre-kindergarten to higher education; and middle-class tax cuts.
The money, disbursed over two years, would offset cuts needed to balance state budgets and would serve as a "bridge" until 2011, by which time the governors hope the economy will have recovered, said Massachusetts Gov. Deval L. Patrick.
Predictably, the Republican Governor's Association called it a "bailout" of the general funds of the various states.
Well, yes. The states, by and large, did not have the ability to get out from under the financial meltdown, and the consequent economic downturn that resulted shouldn't disproportionately affect the least of their citizens. Furthermore, given that the road to recovery is massive fiscal stimulus, having states cutting back on spending at this time, be it infrastructure, education or healthcare, is completely counterproductive and will do nothing but prolong the agony.
In the future, it will take more than backfilling state budget cuts in a downturn, but a more structured system, like a "Federal Infrastructure Finance Corporation," to ensure that state assets aren't sold off to private interests during a downturn. The days of creative borrowing and the crossing of fingers are over. We need new structures to manage economic volatility and avoid fiscal traps, PARTICULARLY in California, where the tax system too closely mirrors the boom and bust cycle.
In the near term, I imagine something like this will pass. Barack Obama today put out a call for "strategic investments" to create jobs and improve the long-term economic outlook simultaneously. The question locally is whether California's plans will actually accomplish that. CalPIRG is criticizing the state's wish list, saying that it relies too much on increasing highway and road capacity and not enough on cleaner energy investments:
The California Public Interest Research Group reports that the state plans to spend 31% of road money on creating new capacity instead of addressing long-deferred maintenance and repair projects. By contrast, the group said, Massachusetts would commit 100% of its road funds to repairs.
"We can't afford to waste precious resources on new highways at the expense of ready-to-go projects to repair and maintain existing roads and bridges and expand public transportation," said spokeswoman Erin Steva.
The group also faulted the California Department of Transportation's list, saying that only 37% of the funds would flow to public transportation. The group called for a higher percentage, citing the record ridership on California's mass transit systems, which have been hit by severe cutbacks in recent years. The proposed percentage is less than what is being planned in Tennessee, Wisconsin and Massachusetts, CALPIRG said.
It is elemental that the stimulus spending cannot prop up an unsustainable growth model based on sprawl. Experts up and down the state understand this, and one of the best examples is in this Merced Sun-Star editorial, which nicely explains the tension between speed and smarts:
The problem for the planners is that the stimulus must be geared toward putting people to work as fast as possible. That, many believe, argues for the traditional sort of public works, such as highways.
In many cases, plans are already in place to replace crumbling roads, highways and bridges. By contrast, plans for urban transit systems and intercity high-speed rail are less firm, meaning it may take more time to actually start turning dirt and generating paychecks [...]
We're confident that a solution exists that puts people to work right away and also lays the groundwork for a new approach to the nation's transportation needs.
It won't be easy, but it has to happen. We can't continue to simply build more transportation infrastructure on a model that's now more than a half-century old.
A new model for transportation is part of the change we need.
Read the whole thing. One good idea calls for phased stimulus spending, giving enough for critical highway and road repairs at the start, with the bulk coming later for transit and rail projects.
The Schwarzenegger Administration unveiled a new budget plan today, calling for more tax hikes and increased borrowing. One notable omission from the plan was Arnold Schwarzenegger himself.
"We are facing a major crisis, probably the most challenging budget situation the state has ever faced," said Mike Genest, Schwarzenegger's finance director. "The governor believes in acting immediately."
Schwarzenegger is out of state and vacationing at the family residence in Sun Valley, Idaho.
That's some amusing juxtaposition from the Sacramento Bee.
On to the proposal, which is little more than just a warmed-over recapitulation of earlier proposals the Governor has made, with some new elements from right out of fantasyland.
That plan called for a temporary increase in the state sales tax, expanding the sales tax to cover some services, a nickel-a-drink alcohol tax, a new tax on oil production and a $12 hike on vehicle registration fees. It also called for $15.4 billion in spending cuts, including requiring state employees to take two-days-a-month unpaid furloughs through June 30, 2010 and give up two paid holidays each year.
The new elements include reducing the dependent care exemption on state income tax returns from the current $309 per dependent to $103; carrying over some of the deficit into the 2010-11 fiscal year; borrowing funds from voter-created programs that service the mentally ill and pre-kindergarten children's health services; changing the operating rules for the state lottery in an effort to make it more profitable, and borrowing $4.7 billion from the private sector.
If there's one thing the private sector is desperate to do right now, that's take it's carefully guarded cash and give it to the state with the worst bond rating in the country. They're really dying to get that done.
The real patterns we see here are familiar to all of Arnold's budget - a deep lack of concern for the most marginalized elements of society, and a hearty desire to break unions. Schwarzenegger's lowest point as a politician as maybe as a person was getting blown out in the 2005 special election. He still believes the ideas he put forward in that election were sound, and blames unions for his defeat. Thus you see Arnold going after union members' livelihoods, insisting on state employee furloughs and generally trying to roll back labor protections that this state has held for decades.
In addition, there's a recognition that this budget hole is impossible to fill without a magic angel. The proposal names that angel "private borrowing," but that's just not going to happen. The angel is going to have to be federal relief from a stimulus package. California reducing its public spending by $10-15 billion at a time when no other entity can pump money into the economy is counter-productive and deeply dangerous to any recovery. The feds are going to have to make up the gap.
Finally, a new proposal looking at the entire $40 billion dollar deficit suggests that the Governor isn't interested in going forward with the $18 billion dollar work-around budget which he has been negotiating with Democratic leaders. That would be a mistake, because of the exponential effect of continuing to do nothing in the immediate term. Then again, if he were interested in action, the Last Action Hero wouldn't be in Idaho right about now.
...if you want to go through it yourself, the budget plan is here.
...statements from legislative leaders on the flip.
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.
The national media is starting to pick up on the developments with the California budget, and their potentially devastating impact on the larger economy. Bloomberg has an article on the shutdown of infrastructure projects and the impact statewide:
Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms.
"I've been on the bench for 23 years, and I've never seen anything like this," said David G. Sills, the presiding justice for the Fourth District Court of Appeals, Division Three, in a telephone interview.
California's worst budget crisis has held up $3.8 billion in spending on public works, possibly including the courthouse adjacent to Santa Ana City Hall. Sills and his seven fellow jurists had planned to move in before the lease on their temporary offices expires June 30.
"Everyone will have to work from home," said Sills, 70, "and we'll have to rent a place for when we hear arguments."
The story ticks off all of the projects lying unfinished - highway improvements, bridge and levee repairs, a hospital at San Quentin, a middle school in South Gate. The delays are not only a threat to the soaring unemployment rate and the state's economic future, but public safety.
South of downtown Los Angeles, a delay finishing a school building could put children in danger, said German Cerda, principal of South Gate Middle School. About a third of his 2,900 students are scheduled to move into the new building a half-mile away in 2012, relieving overcrowding inside and making nearby streets safer, he said.
On Dec. 2, a 14-year-old South Gate student was killed when a car stuck him a block away, an accident Cerda attributed to congestion.
"The biggest complaint we get from parents is what happens when the bell rings at 2:42 p.m. each day," Cerda said. That's the time that his students are dismissed and 3,000 more are leaving a high school down the street. "They don't want to see another tragedy."
Then there are the expected cuts to state Medicaid programs, at precisely the time when more Californians qualify for services.
Among the states with the gravest financial problems -- and pressures on Medicaid -- is California. In July, Medi-Cal, as the program there is known, slashed by 10 percent the rates it pays hospitals, nursing homes, speech pathologists and other providers of health care. It tried to lower payments to doctors and dentists, too, but they have sued to block the decreases.
Gov. Arnold Schwarzenegger (R) has asked the state legislature to approve other cuts, including an end to dental care for adults, about 1 million of whom use it now, and a sharp reduction in care for recent immigrants.
At two hospitals run by NorthBay Healthcare, midway between San Francisco and Sacramento, about one patient in five is on Medi-Cal. The rate cuts translate into a $4 million loss this year. In September, the health system closed a rehabilitation program for children that provided physical therapy, speech therapy and other help to about 300 young patients at a time -- with 100 more usually on the waiting list.
"It was heart-wrenching to have to go out and announce," said Steve Huddleston, NorthBay's vice president of public affairs.
The Obama campaign is weighing options for both backfilling Medicaid for the states and jump-starting infrastructure spending through cash infusions. However, the biggest thing the federal government could do right now is what John Chiang describes in a letter to the Obama transition team and California's congressional delegation - guarantee the financing for infrastructure projects. The reason they cannot be funded right now is that the market for revenue anticipation notes and bonds is locked. Though California has never defaulted on these securities, investors are nervous that the careening budget crisis will cause them to do so. So putting the full faith and credit of the US government behind the notes, which if California does repay its creditors would cost the feds next to nothing, would immediately allow the infrastructure projects to begin again. That's the short version - here's Chiang with the greater plan, including incentives for banks to lend.
This proposal is simple, straight forward and cost effective:
1) Develop a federal guarantee program of limited duration for state and local debt issued to fund new infrastructure construction and renovation. Each state could designate a state commission or agency to disburse the state's allocation of federal guarantees in accordance with the program guidelines;
2) Allocate these benefits, or guarantees, in the amount of $500 to $1,000 per capita to states. The allocations can be based on unemployment or 2000 census population, with a minimum "baseline" allocation to low-population states; and
3) Furthermore, the proposal would greatly benefit from abolishing the limit on the amount of deductible interest costs for commercial banks related to the purchase of these particular state and local infrastructure bonds during the term of the program. This restriction has been in place since enactment of the Tax Reform Act of 1986.
This would mean the restoration of up to 200,000 jobs in California alone, as well as $16 billion in economic activity. Those are numbers that an incoming Obama Administration cannot afford to lose as they begin implementing a recovery package.
Obviously, the biggest remedy to show confidence to the markets and gets the lending flowing again would be to pass a budget and prove to investors that California is getting its financial house in order. That is up to the Governor to decide, and 200,000 jobs hang in the balance.
With the Governor and the legislature still no closer on a special session solution on the budget, Controller John Chiang issued a strong warning about the very near future, finally bringing public the possibility of IOUs for state vendors:
"Specifically, my office will be forced to pursue the deferral of potentially billions of dollars
in payments and/or the issuance of individual registered warrants, commonly referred to as IOUs," Chiang said in a letter to the governor and other officials.
"In order to ensure that the State can meet its constitutionally required obligation to schools and debt service, the Capitol's budget paralysis may leave me no choice but to, in full or in part, withhold payments or to issue IOUs to other individuals and entities entitled to state payments. Given the current financial instability of the banking industry, it is highly unlikely that the banks, if they accept the IOUs at all, will be able to do so for any sustained period of time. Consequently, the recipients of the registered warrants may have no apparent options but to hold them until redemption."
Chiang said his office is also pursuing the issuance of "revenue-anticipation warrants," a form of short-term borrowing that carries high interest and heavy fees because it's believed that the state cannot issue "revenue anticipation notes" that would have to be repaid by June.
If it was impossible to sell revenue anticipation notes to lenders, I don't see why they'd accept revenue anticipation warrants, even if they offered the promise of higher interest rates.
It goes without saying that this stalemate, and the prospect of eliminating vital services, comes at the worst possible time, when California's most at-risk citizens need a social safety net the most. The California Budget Project detailed this today in a paper, appropriately titled Proposed Budget Cuts Come at a Time of Growing Need.
More Californians are turning to income support and related programs, such as Food Stamps, WIC, Healthy Families, Medi-Cal, and CalWORKsfor assistance.
Increased demand for public programs comes at a time when policymakers have proposed deep cuts to health and human services programs to close the state's budget gap.
However, prominent economists argue that carefully chosen tax increases are preferable to spending cuts during a recession because "steep budget cuts will exacerbate the economic downturn and harm vulnerable low-and moderate-income"families.
With unemployment rising to the third-highest rate in the nation, with one in five Californians out of work for longer than 27 weeks, with projections of the unemployment rate rising over 9.3% by 2010, with almost a million Californians underemployed (working less than they'd like), with applications for food stamps up 33% over the past year, and with every county in the Central Valley experiencing double-digit unemployment, including an incredible, depression-era 23.4% unemployment in Imperial County in Southern California, the prospect of losing vital services to those affected would be absolutely devastating. And yet that's where we are. County governments are already expecting the worst, to have their funds raided by the state to eventually fill the budget hole, so they're cutting back. The self-sustaining cycle of cutbacks creating job loss creating less revenue creating more cutbacks has already begun. And that's why it's not just bad politics but horrible policy for Schwarzenegger to hold the state hostage for extremely marginal rewards that will almost certainly be overturned once he's out of office anyway. His intransigence, perhaps based on his inability to get anyone in state government to listen to him, is puerile nonsense. But it also really hurts people.
As I've said continuously, the budget mess in California cannot be solved under the current broken system without serious help from Washington. Fortunately federal lawmakers are fighting for state and local government relief for California, done in such a way that we can actually access it without having to put money up front (which is impossible given the current cash-flow crisis).
(As a side note, I want to on behalf of the editorial board thank our friends in the blogosphere for driving attention to our ongoing Calitics budget coverage, in particular paradox at The Left Coaster. I think I speak for everyone in saying we appreciate the links and support.)
I urge anyone who cares about California to listen to yesterday's Which Way, LA. It'll make your hair stand up. The program was about the decision by the Pooled Money Investment Board (basically Treasurer Lockyer, Controller Chiang and Schwarzenegger's Finance Secretary Mike Genest) to shut down almost 2,000 public works projects, from schools for the deaf in Riverside to highway improvements along the 405, from hospital construction to transit projects and fire prevention services in heavily forested areas, affecting the entire state and as many as 200,000 jobs over the next several months.
The problem is that California is out of money. But it's bigger than that. The state floats revenue anticipation bonds to cover these kind of public works projects, and indeed the voters approved all kinds of infrastructure bonds in 2006. The issue is that investors simply won't buy them. They believe that California will default on their commitments at some point or another (though it's never happened before) due to the instability of the budget process. Coming up with a work-around to get the budget more balanced (at the expense of hard-won labor rights for public employees, it appears) will go some of the way to fixing that, but NOT all the way. We're at a point of extremely low investor confidence. California has the worst bond rating in the country. So it's not at all clear that the shovels will be picked up again even if the legislature passes and the Governor signs a budget deal. The systemic budget cycle of catastrophe is what's keeping investors away. And of course, if the work-around falls apart or the courts strike it down, the state will be out of money in February and vendors will start receiving IOUs.
What's more, if the Obama Administration offers massive infrastructure spending as part of a recovery package early in his term, EVEN THAT won't necessarily get these projects going. As I understand it, federal grants of this nature often require up-front money from the states, and the opportunity for matching funds if the state kicks in the first 25%. At this time we don't have that money, so we wouldn't be able to access the match. I assume Speaker Pelosi knows this, but it will be difficult to alter the standard practice on this kind of federal spending.
We're talking about 200,000 lost jobs and an infrastructure shutdown at precisely the moment when infrastructure spending is seen as the key to economic recovery, with multiple obstacles to getting them going again. And the state could be liable for whatever rises as a result of the shutdown:
Lockyer and other members of the Pooled Money Investment Board predicted that unless the state balances its budget, the funding shut-off will further harm the economy and expose the state to lawsuits.
"The likelihood of contract breaches is probably 98 percent," Lockyer said [...]
Also at financial risk is a new levee on the lower Feather River in Yuba County and a planned bolstering of Folsom Dam for flood protection.
Assemblyman Dan Logue, R-Linda, said the suspension of state funding for the Feather River levee project, already under construction, would put 40,000 people at risk in an area that has flooded twice in the past 25 years [...]
"This (could) put tens of thousands of people's lives at risk, and I believe the state will be liable if there is any damage," Logue said. "The state is responsible for those levees in the first place."
This looks to me like an unending nightmare. If I were Hilda Solis or any California politician, I would want to get the hell out of this state too. It looks like it'll fall into the ocean. But hiding from the problem is a mistake. This has the potential to take down whatever economic recovery we may see come January. The federal government needs to provide direct relief, not grants, to the state, or at the very least guarantee the bond issues so that we can restart the issuance of revenue anticipation notes. You can run, but you can't hide from California.
I want to publicly thank Jordan Rau and Patrick McGreevey for ripping off my "Scared Straight" moniker to describe yesterday's joint legislative session. This is par for the course with the traditional media creatively borrowing the work of bloggers without attribution. Hey, at least our site didn't send us into bankruptcy.
UPDATE: Mr. Rau, in a somewhat snippy but professional email, tells me he doesn't read the site and the "Scared Straight" idea was independently his. Fair enough.
As for the effectiveness of the "Scared Straight" session, which posited that all state infrastructure projects would be shuttered by the end of the year without a new budget, and that the state would be essentially out of money by February or March, and that doing nothing will make the problem substantially worse... well, let's just say it could have gone better.
The Republicans, who attended reluctantly, refused to accept tax increases, instead emphasizing the importance of limiting state spending and ferreting out waste and bloat in existing programs.
"I didn't see a lot of productive work there today," said Senate minority leader Dave Cogdill (R-Modesto). "I think it was more about trying to heighten the intensity around this thing and push people to a place that they have been trying to push us to for a long time, and I don't think it's going to work."
Sen. Dave Cox (R-Fair Oaks) held aloft two weighty yellow tomes produced by the last effort to trim state government -- Schwarzenegger's 2004 California Performance Review, which suggested 279 ways to save money by reorganizing the state bureaucracy. Almost none were adopted.
Look! The answer is just holding up the performance review and shuffling around the bureaucracy!!! Ahem...
In his comments, Mac Taylor, the Legislature's nonpartisan fiscal analyst, described the folly of trying to close the gap either by taxes or through spending cuts alone. A tax-only solution would require increasing the sales tax by 2 cents, adding a 15% surcharge to the personal income tax and hiking corporate taxes by 2% -- making all of those taxes the highest in the nation, he said.
Taylor said erasing the budget gap by cuts would require lawmakers to end all funding for the University of California and state universities, welfare grants, developmental health services, mental health and in-home supportive services.
It's of course a red herring that Democrats are seeking a "tax-only" solution, one that Karen Bass sadly saw fit to perpetuate yesterday by stating "I think some of my colleagues on both sides of the aisle are living in denial, frankly." Um, every Democrat in the Legislature voted for a shared responsibility budget that raised revenue and implemented painful cuts. If Bass doesn't want to make the fight at all, she ought to let everyone know. It's not helpful to try and spread the blame equally. We have a Yacht Party that has no intention of lifting a finger in the face of crisis. In fact, they see it as their opportunity to drown government in the bathtub and eliminate the social safety net permanently.
This is why the state GOP is bordering on irrelevancy throughout the state (BTW, if you want to laugh, read Ron Nehring's prescription for Republicans. Clueless and pathetic). Californians have thoroughly repudiated the Yacht Party vision. However, this is true everywhere but in the legislative chamber in Sacramento, where the 2/3 budget and tax rule allows them to hijack the legislature. In the long term, there is nothing to do but to capture a 2/3 majority and finish the irrelevancy project. In the interim, California's Democratic lawmakers are better off flying to Washington, DC, where at least they'll have a chance of getting money for state and local governments in the new stimulus package, then staying in Sacramento, where they have no shot at breaking the stalemate. That's just reality.
Scared Straight didn't work. On to DC.
UPDATE: This is better from Karen Bass. I'll put the whole release on the flip, but she is, as she has been doing repeatedly throughout the crisis, calling for specific aid from DC. A taste:
Meeting with California Congressional leaders and President-elect Obama's transition staff, Assembly Speaker Karen Bass today outlined specific steps the federal government can take to boost California's economy and ensure that the state can actually benefit from stimulus packages currently under discussion.
"Infrastructure investment is critical to getting the national and state economies back on track," Bass said. "But the major spending cuts and tax increases that California and other states will need to balance our budgets could undermine the success of any infrastructure stimulus efforts. Today, I shared with Representative Barbara Lee from the Appropriations Committee and President-elect Obama's transition office California's firm belief that direct federal assistance has to be part of an economic stimulus plan."
At Tuesday's board meeting Superintendent Terry Brace explained the district will lose $3.5 million under Gov. Arnold Schwarzenegger's proposed budget plan.
If that passes, the district's three percent reserve will be pushed to the limit to cover expenses. Brace said the aim will be to maintain educational programs first. After that, "we want to cut things and not people," he said.
Kings County officials implemented a hiring freeze Tuesday as one of several measures to circumvent anticipated funding cuts from the state in the midst of a faltering economy. The county had already been on a limited or "soft" hiring freeze since July 1, the freeze affecting only positions that won't affect the basic level of service. No reduction in staffing levels were being considered.
County Administrative Officer Larry Spikes says it's a necessary measure to protect the county's fiscal health in light of the worsening state budget crisis underscored last week by the governor's call for a special session to close the deficit. Never before in California history has a governor called an "extraordinary session" so late in the year.
Efforts to close an $11.2 billion state budget deficit have shaken up the state's Healthy Families program, which provides health care to about 13,300 children and pregnant women in Stanislaus County.
Next month, the state is preparing to freeze enrollment in the program, which provides medical, dental and vision care to children whose families earn too much to receive Medi-Cal but can't afford private insurance. If the Managed Risk Medical Insurance Board approves the proposal Dec. 17, families trying to enroll children will be placed on a waiting list at least until June 30.
This is what's happening in this state, at precisely the wrong time. During an economic downturn, with the attendant job loss, people need more services, not less. It's the perverse cycle of constrained state budgets with their balanced budget amendments that they need to cut back precisely when they should be expanding. In a downturn, government must be the spender of last resort, yet the state Constitution doesn't allow it. And cutting the budget to get it in balance during this greatest fiscal crisis since the Great Depression would be an absolute disaster. And frankly, the Yacht Party isn't going to agree to anything sensible.
It would be better for all involved if the entire Democratic caucus decamped from Sacramento to Washington and sat outside Nancy Pelosi's office until a stimulus package with aid to state and local governments passed. Otherwise, the local stories are going to get worse and worse.
So the legislature has scheduled a weekend vote on a new budget plan for the special session. It could be that they will vote on Governor Schwarzenegger's plan without modification. In fact, that's almost certain, because Denise Ducheny, the chair of the Senate Budget Committee, is in India until next Wednesday, and unless she's holding hearings in Mumbai, I don't think she'll be marking anything up.
So what exactly ARE they going to vote on?
The basic political dynamic that caused a record-long impasse over the state budget last summer - Republicans blocking any new taxes, and Democrats vowing to protect services from deep spending cuts - has not changed. Even so, Schwarzenegger is expected to gather with the Democratic and Republican leaders this morning, after more than three hours of talks on Monday.
"We're committed to making a dent in this problem with this Legislature and not waiting until Dec. 1," Darrell Steinberg, the incoming Democratic Senate leader, said after Monday's negotiations. But asked if he knew what legislators would be voting on Sunday during the scheduled floor sessions, he said, "We definitely don't know yet."
The Governor seemed to suggest in this weekend's interview with George Stephanopoulos that his proposal would be changed before the vote, but I don't see how that would happen.
STEPHANOPOULOS: Yet, your critics say that this one-and-a-half- cent sales tax is the most regressive form of tax. It's going to hit the people who are going through the toughest times right now the hardest.
SCHWARZENEGGER: Well, no one should be that worried about any of that, because remember, the way it works is that the governor puts up a proposal, and then the legislative leaders go and start debating over that and looking into it, if they maybe have a better idea or a different idea. So we have a very collaborative kind of approach to the whole thing. So they may come up with different type of taxes.
Get to work, Sen. Ducheny! Or maybe the hordes of lobbyists can come up with something.
Meanwhile, at this point, it seems like the best option for the state is to beg the Congress for aid. The stalemate with the Yacht Party is overwhelmingly likely to continue, and the numbers that California would need to survive are dwarfed by the handouts to banks and other industries. The Governor has been lobbying for support as well, and Speaker Pelosi appears to agree that some aid is needed. Without that help, we're going to see cutbacks even worse than lowering future enrollment at CSU by 10,000 students. And sadly, it's better at this point to seek help from Washington than Sacramento.
As the special session gets underway, the new "Budget Nun" Mac Taylor, and since it's a he this time I think we'll go with "Budget Priest", has released an overview of the Governor's proposals. The first thing that pops out is we now have a new shortfall number: $28 billion for the next 20 months, and an unsustainable long-term deficit thereafter.
State Faces $27.8 Billion Shortfall. We concur with the administration's assessment that the state's struggling economy signals a major reduction in expected revenues. Combined with rising state expenses, we project that the state will need $27.8 billion in budget solutions over the next 20 months.
Long-Term Outlook Similarly Bleak. The state's revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013?14 absent corrective action. From 2010?11 through 2013?14, we project annual shortfalls that are consistently in the range of $22 billion, as shown below.
Overall, Taylor is generally supportive of the Administration's proposals for closing the gap, but I think that has a lot to do with the fact that the Governor is finally using realistic numbers and not employing any borrowing gimmicks. Compared to the 2008-09 budget, this is extremely welcome. However, Taylor makes the point that a short-term increase in the sales tax cannot possibly be the backbone of a long-term solution, and three years out we'd still see deficits in the range of $9-11 billion. Instead, he offers a couple points. First is one that I've been making a lot, that California needs to lobby hard for state and local government relief in the second stimulus package:
In the coming months, there is a good chance that Congress will pass economic stimulus measures in an effort to boost the national economy. In the past, some components of such measures have directly provided state fiscal relief. To date, the administration has not built any estimates of such relief into its budget numbers. For the time being, this is appropriately cautious to avoid counting on relief that may never come. The state, however, should continue to press the federal government for economic stimulus measures that will provide California with flexible fiscal relief. While such relief would not solve the state's budget problem, it could provide several billions of dollars in budgetary solutions.
(While we're at it, we could also recoup the $2 billion giveaway to Wells Fargo precipitated by the Treasury Department illegally changing the tax code to allow banks to avoid corporate taxes. Any California Congresscritters want to hop right on that?)
He also rightly notes that the Governor's tax proposals are regressive in nature, and offers one final solution - fix the VLF that you broke as your first act in Sacramento.
Alternative Program Realignment. As noted above, raising the VLF tax rate to 1 percent has merit from a tax policy perspective. If the Legislature made it the foundation of a program realignment with local governments, programmatic outcomes could be improved as well. Under this approach, $1.6 billion of state criminal justice and mental health programs could be realigned to counties and supported by (1) the revenues raised by the increase in the VLF rate and (2) most of the VLF fee revenues currently retained for administrative purposes by the DMV. By consolidating these program responsibilities at the county level, and giving counties significant program control and an ongoing revenue stream, we think California could achieve greater program outcomes and significant budgetary savings.
You can see the total savings chart at the end of this PDF, but clearly the VLF raise is the big story here. The LA Times picked it up as a news story and also on their op-ed page today. For those who counter that the VLF is just as regressive as the sales tax, it doesn't have to be.
Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.
You can also build progressivity into the VLF by having it function as a carbon tax, essentially. You could set the VLF at a higher rate for cars that produce greater emissions, and at a lower rate for cars that are cleaner. As California is about to get a waiver to regulate tailpipe emissions under the Clean Air Act in a new Obama Administration, they would certainly be empowered to do so.
This is a repudiation of the very issue Schwarzenegger ran on in 2003. We'll see if he's inclined to own up to his mistake.
I STILL haven't had a moment to process the still-brewing outcome of Election 2008 here in California, but there's not much time to savor or despair about the results. A new session of the Legislature has been called, and Arnold is starting off by calling for a tax increase:
Gov. Arnold Schwarzenegger called today for a temporary 1.5-cent increase in the state sales tax to help close an $11.2 billion deficit in the state budget, as well as new taxes on liquor and oil production.
Schwarzenegger also proposed one-day-a-month unpaid furloughs for state workers for the next 17 months, as well as rescinding two of the workers' 13 paid holidays.
There are also massive spending cuts planned, $4.5 billion in all, including $2.5 billion on primary school education. This is all happening because we have a short-term deficit of maybe $10 billion dollars, with an additional $13 billion dollar shortfall estimated for next year. In all, by the middle of 2010, the projections are that we will be $24 billion in the hole.
This proposal is completely and utterly insufficient to deal with that. A sales tax increase is regressive and there's no way around that. Part of the proposal to extend the sales tax to services like "appliance and furniture repair, vehicle repair, golf fees, veterinarian services, amusement parks and sporting events," according to the LA Times, and this is part of Karen Bass' restructuring of the revenue side. And an oil extraction fee is deeply needed. We're the only oil-producing state in the country that does not charge oil companies to take our natural resources.
But the cuts are pretty cruel. And education isn't the only thing on the chopping block. The Governor wants to eliminate dental insurance through MediCal for poor Californians, cut welfare subsidies, and reduce services for the elderly, blind and disabled. Hey, they don't have lobbyists, right? And this proposal somehow snuck into the package:
• Relaxing some state labor regulations dealing with meal and rest periods, overtime exemptions and work schedules.
Hey, it wouldn't be a Republican plan if there wasn't some giveaway for business.
There is no question that the state's finances are in the worst shape since the Great Depression. But those Californians doing well have shown, as Robert notes today, a desire to pay for those services that can make this a great state. It's aberrant for people who are wealthy to pull up the drawbridge and have no concern for the least of society. Their continued economic good fortune depends on the stability and security of all citizens, as a rising tide lifts all boats. We have been in a constant state of economic crisis for going on eight years because nobody will admit what needs to be done - to have a revenue structure that doesn't reflect the boom-and-bust cycles of the greater economy.
A couple of the things that Schwarzenegger is doing make sense. He is calling for a 90-day moratorium on foreclosures so lenders can work out loan modifications with borrowers, something President-Elect Obama has already proposed and which will improve our economy (a foreclosure costs something like $250,000 a piece to the economy). And his proposal would speed public works programs as a kind of statewide stimulus package. But the very first thing that can be done is to reinstute the automatic VLF increase that Arnold cut and is now scrambling to cover, which would cost the equivalent of $12 a month for most Californians. But Robert Lehman at SEIU has outlined a new progressive version of the VLF that I think would increase revenue and help protect the climate.
Dedicated Revenues. VLF revenues, based on up to 0.65% of vehicle market value, are dedicated (CA Constitution Article 11, Sec. 15, implemented by Proposition 47 in 1986) to cities and counties; some additional VLF revenues above 0.65% may also be partly dedicated to cities and counties, depending on current statutes. It is unclear whether additional revenues from a vehicle GHG-emission-based component of the fee, rather than the vehicle market value, might be obligated to cities and counties. GHG component revenues should be made available for other dedicated purposes, such as improving State transportation GHG emissions through R&D, energy infrastructure improvements, transportation equipment subsidies or incentives, etc.
Progressivity. The VLF is currently based on a flat 0.65% rate applied to the current estimated market value of the registered vehicle. Owners of newer and more expensive vehicles with higher current market values pay higher level fees, while owners of older and less expensive vehicles pay less. People without vehicles who use mass transit, bicycles, or other forms of transportation do not pay the fee. The 2003 reduction of the VLF heavily benefited Gov. Schwarzenegger for example, with his ostentatious fleet of Hummers, while mass transit riders did not benefit at all.
With this flat fee structure, the VLF still absorbs a larger share of low-income vehicle owners' household income than it does for upper income Californians; the VLF's moderate regressivity is similar to that of the sales tax in terms of its relative burden on the lowest income quintile compared to the upper quintile (see UCB Incidence paper below, and CBP, "Options for Balancing the Budget: Reinstating the Vehicle License Fee," 5/8/02, p.2). A more progressive alternative exists. Rather than assessing the fee on the full value of the vehicle as California has done, Virginia exempts the first $5,000 of vehicle value, making the fee more progressive. With a $5,000 exemption, for example, an estimated one third of California vehicles would be exempt from the VLF and owners of slightly higher value vehicles would pay significantly less. The exempt value could be adjusted over time. A restored VLF should initially be based on vehicle value, with a significant deductible amount from this value, and a rate probably set above 2% to compensate for lost revenue.
This is a smart idea and should be the first counterpoint that the state Democrats propose. At some point we must start raising revenue sensibly. Furthermore, doing anything before December 1, when a net of 2 new Democrats in the Assembly and possibly 1 new Democrat in the Senate join the team in Sacramento, would be ridiculous.
• Nancy Pelosi is going to ask for a second stimulus that includes aid for state and local governments, extending unemployment benefits and investment in infrastructure. This is desperately needed and she needs to follow up and we have to pressure her. It's good for California and the nation.
• 538 did a "road to 270" feature on California a couple days back. Nothing in there you wouldn't expect, other than some good demographic information (our Starbucks/Wal-Mart ratio is second in the nation).
• I don't know if we've featured this in a post or not, but this ad for the Yes on 4 campaign is completely despicable and everybody involved in it should be ashamed of themselves. Apparently devoid of shame, the campaign, after saying they'd only run it once, has expanded it and aired it in selected markets last night after the Presidential debate.
• Here's a fundraising breakdown for all 12 propositions. No on 4 has quite an advantage and they need to use it. Yes on 5 has a large advantage as well. There is no committee for No on 1A. Same with No on 10. It's an interesting set of numbers.
• This is a sad story about a family of six murdered by the head of household, who had an advanced degree in finance but couldn't find a job. I take no pleasure in saying this could be replicated around the state as we hit this downturn.
• You may remember Delecia Holt, the perennial Republican candidate in the San Diego area who suffered allegations of campaign fraud. She's now been arrested for writing bad checks and avoiding bill collectors.
... Let's face it, we can only have a stimulus package if the President is willing to sign one. But we can only go as far as the President will sign.
That's House Speaker Nancy Pelosi starting the negotiations on a second stimulus package by giving away the farm.
There's an old story in Texas about a young man whose daddy has sent him to trade horses on his own for the first time. He meets a wise old sharpie and the guy says, "So how much do you want for that horse son?" The kid answers: "Well Daddy told me to ask for $100 but to take $50." "That's great kid, here's $50, give your daddy my regards."
That's what the Congressional Democrats do EVERY TIME.
While every stop is being pulled out to save the Wall Street "Masters of the Universe", state governments across the nation are being pulled into an economic black hole. It's no surprise that President Bush doesn't care, but its very frustrating to see Pelosi being complicit in his indifference.
She's apparently telegraphing her willingness to throw the states over the side. Why not make the most unpopular president in history veto a bill that would be popular just in time for the election?
Not having a vote on a strong economic recovery package is bad politics. Bad terrible awful dumb politics. What's the point of electing Democratic Members to Congress if they won't stand up for Americans even when the President won't?
Newsflash to the Democrats on Capitol Hill, this is the perfect time to force some Republicans up for re-election to put themselves on the record as opposing a package to save the economy.
But Pelosi doesn't get that concept. Instead she wants to pass something on the first go and she's so eager to please the president that shes pre-gutting a second stimulus package. Even though she's talking a good game to the press:
Pelosi renewed her vow to try to pass a stimulus measure that would combine billions of dollars for jobs-producing infrastructure projects, more food stamps, additional Medicaid aid to states, home heating subsidies and a further extension of unemployment insurance.
Persistent rumors from Capitol Hill indicate that she's telling the White House that she's willing to throw the Medicaid aid to states overboard.
Should we settle for a bill that only goes halfway in addressing the economic crisis? No. We did that once, earlier this year, and the first stimulus package failed.
This has been on the table for a long time. The same experts who said the first economic stimulus package failed also said aid to states needs to be in the next stimulus:
If a second round of stimulus is necessary, other options that should be on the table. These include payments to states that will need to cut spending because of balanced budget provisions as their tax revenue falls.
And in a letter to House Leadership in late January as the first stimulus package was being prepared, a bipartisan group of 39 Governors "requested that state aid be included in the stimulus:
The nation's governors urge you to include state countercyclical funding as part of your legislation to stimulate the economy.
...
In 2003, Congress approved $20 billion in assistance to states, including $10 billion in Medicaid and $10 billion in block grants. The governors' current stimulus proposal is essentially the same, with the exception that it is a total of $12 billion as opposed to $20 billion. This proposal can be enacted quickly, as there is precedent and it is timely, temporary and targeted.
The plan is there, we know what is needed to help dig us out of this economic muck, and potentially shield the states from further dramatic losses if Wall Street keeps acting up. Our mentality shouldn't be "take what we can get" it should be "this is what we need, this is what will pass." If Republicans want to vote against improving the economy, let them explain it to the voters.
It's time to have a clear vote on a real, working economic stimulus package. It's time to show voters there's a real difference between Democrats and Republicans.
A week after the the Washington Post completely botched their assessment of a second stimulus package, the New York Times turns around and nails it.
Their editorial entitled "No End in Site" lays out perfectly what the next few steps should be to help the economy whether this current storm. They begin by stating the obvious:
Lawmakers need to start crafting the next stimulus bill — without repeating the mistakes of the last one. Composed mainly of tax rebates, as the White House wanted, the first stimulus was too broad to deliver a powerful punch.
Amen. It is clear that the first round of stimulus checks didn't work. The editorial then confirms what many experts have been saying is a real potentially relief-filled measure that Congress needs to take with the second stimulus package:
The next package has to focus on actions that are known to yield big economic benefits: bolstered food stamps, which rapidly boost consumption; and aid to states and cities so they can continue to provide essential services.
Lawmakers should also invest in infrastructure projects, like repairing bridges and roads. If not, projects that are already under way may have to be canceled, creating more unemployment.
Thank you. The fact that state and city governments are not asking for money to continue radical spending on pet projects, but instead to protect essential services like education and health care seems to be lost on the minds of those who are not in favor of including state aid in a second stimulus package. Every week there are stories upon stories of states being forced to slash budgets, pay, and jobs. They are a linch pin of the economy and no one seems to notice. And investing in infrastructure will ensure that we don't add thousands of workers who make their living off of said infrastructure projects. The construction industry has been hit hard enough as is.
The editorial also touches on a response to the home foreclosure crisis:
Congress also needs to ensure that a $4 billion grant to states and cities to buy up vacant properties is quickly and efficiently distributed. The Department of Housing and Urban Development is developing the formula for allocating the money, and early indications suggest it is on top of the process. But the White House is contemptuous of the grant, calling it a gift to speculators when it is actually a lifeline for ailing communities.
If you aren't a Bush republican who just hates any sort of aid not aimed at the highest income bracket, then the main criticism of this effort is that is simply not enough to have an impact on the housing market. Whether or not this is true remains to be seen, but it is still $4 billion to help turn foreclosed properties that the states with said properties currently do not have. In that regard it is a stabilizing factor, even if it is not the stabilizing factor that ultimately turns the foreclosure crisis around. As the editorial says, it is a lifeline for ailing communities who simply do not have the money do to anything with these foreclosed homes.
The time for action is now, but because Congress is in recess the time for action will actually be September. The article suggests the difficulty with creating a second stimulus package in an election year, but brings up the most important point of them all:
Millions of Americans are already suffering. And we fear millions more will be hurt before this crisis ends. They cannot wait until after the election for help.
A very valid point. It's hard to care about battleground polls, attack ads, and town halls when you're losing your job and your home.
Californians know how important a second stimulus is, which is why it is so frustrating when publications closer to the city where these decisions are made fail to understand or simply neglect many of the facts associated with a second stimulus package.
Last week the Washington Post Editorial Board came out with an editorial blasting a second stimulus package as an unnecessary election year ploy:
We understand the political logic of a second stimulus; the economic case is less convincing. Any fiscal stimulus must be targeted, timely and temporary. That is, it must put money in the hands of people who are likely to spend it quickly -- while not committing the federal government to new long-term spending.
Naturally to make their case the Ed Board selectively picks and chooses which parts of the stimulus package to highlight.
House Speaker Nancy Pelosi has called for a $50 billion package, possibly including increases in food stamps and home heating assistance as well as more Medicaid money for states and new infrastructure spending. Fleshing out Ms. Pelosi's concept, Senate Appropriations Committee Chairman Robert C. Byrd (D-W.Va.) has unveiled $24 billion in proposed energy, infrastructure and disaster relief money.
We'll move beyond the fact that many people think supplemental medicaid funding is a really good idea to the more pressing point; the Wapo Editorial Board failed to mention or mention only in passing two plans that many experts say should be the staples of any second stimulus package; aid to states and infrastructure spending. AWall Street Journal article from last month (subscription only) shows Congressional leaders getting on board with the idea so I am lost as to why it received no attention in the Op Ed:
The bill, which would likely include spending on road projects and aid to stated, isn't expected to come up in the House until September
We proved earlier this year that stimulus checks on their own are not the solution to the nation's economic woes. However not recognizing the obvious need for help that states have been screaming about over the last several months is just irresponsible. Not to mention their editorial reads just barely on the sane side of illogical.
Their suggestion that we don't know the effects of the first stimulus yet is asinine. The Post even admitted this on Thursday. On page 10 of the Washington Post Express they ran an article entitled "Stimulus Checks Run Out"
Analysts said retail sales would have been more feeble without the $92 billion in rebate payments the government sent out in May, June, and July. Those checks helped to counter plunging home prices, rising unemployment, and soaring gasoline prices.
The bulk mailings are now over, though, leaving economists worried about what will happen next.
WaPo can't have it both ways. They can't report that the stimulus checks are running out but then opine that we shouldn't have a second stimulus because we don't know the effects of the first.
And sure gas prices have been falling over the last couple of weeks, but today's national average for a gallon of gasoline is still $3.77. Am I glad its down from the high of $4.11 that we saw in mid July? Yes. Am I convinced that this means I don't have to worry about gas destroying my wallet? Absolutely not.
According to the Fuel Gauge Report, gas is still $4.07 in California where their budget crisis has gotten so bad that over 200,000 state employees had their pay rolled back to minimum wage. It's $3.89 in Michigan, where unemployment is skyrocketing. Its $3.98 in New York where Governor Patterson has been forced to slash medicaid by $500 million this year and $1 billion next year. The relief at the pump will be short lived because state governments don't have the resources to ensure normal citizens won't feel the pain of floundering state economies.
The Washington Post should know better. After all, the situation is going from bad to worse in their own back yard. A Richmond Times Dispatch article has Governor Kaine says the budget shortfall could surpass $1 billion. This coming on the heals of cutting $2 billion out of the budget this year. He says he's going to apply the same formula:
Kaine said he probably would apply the same basic principles to the next round of economies that he did previously -- to not cut across the board but target more precisely areas that can be reduced. Some lawmakers and lobbyists aren't sure that's possible.
I'm not sure thats possible either. There are a limited number of areas that can be reduced before you start having to cut education, public safety, health, and other essential services. We may be months away from the endgame, but counties and cities are bracing for the worst.
"We expect, and are preparing for, very bad news," said Michael L. Edwards, a lobbyist for the Virginia Association of Counties.
What the Washington Post fails to understand is that dealing with the nations economic problems has to go beyond fixes for the individual. I would love to receive another check in the mail but it's not what's going to fix this thing. The real solutions lie in federal aid to the states and spending on infrastructure, two moves that will help states who are being forced to make dramatic cuts to essential services and potentially create jobs in states were there are far two few of them. These solutions received little to no attention in the Op Ed, which is really the biggest flaw of all in the piece.
Matthew D. Shapiro and Joel Slemrod of the University of Michigan know what they're talking about. They wrote what many consider to be THE paper on the 2001 stimulus payment and now, according to the Wall Street Journal Real Time Economics Blog, have taken a look at the preliminary data on the 2008 stimulus payments. Where did the money go? It's not too surprising:
The change in the personal saving rate corresponds closely to the size of the rebate as a percentage of disposable income. The figure shows how most of the rebate payments appear to have gone straight into saving.
Which is clearly not what President Bush had in mind when he drew up the checks in the first place.
That most of the rebate checks were saved is, though, consistent with the results we find using the University of Michigan Survey of Consumers. When consumers were asked whether their stimulus check would lead them to "mostly spend, mostly save, or mostly pay down debt," only 18% answered that it would lead them to mostly spend more.
That statement is also pretty much in line with what has been reported in the past couple of months. Still, many have been hearing reports recently that feature consumers talking about how they are spending their rebate checks, making some question whether or not it had more of an effect than originally thought. Shapiro and Slemrod don't buy this argument all the way:
Does such consumer behavior correspond to spending that would stimulate the economy? That depends on what the consumers would have done if they had not received the rebate check. If they would have not made those purchases absent the rebate, then the rebate was spent. If the rebate let them avoid running up higher credit card bills for gas and groceries they would have purchased even without the rebate, then the rebate was saved.
Thus the rosy predictions of Americans flocking to stores to spend their rebate checks may not necessarily indicate that they are having the desired effect of stimulating the economy. And what is their overall analysis of how this first stimulus package worked out?
Nonetheless, the rebates are likely to be less effective in stimulating the economy than policymakers had hoped.
In reality Shapiro and Slemrod only add another reliable source to the masses who have highlighted the failure of the first stimulus package to boost the economy. They also join another group that has been picking up steam lately; those who think investing in the states should be a central tenant of any new stimulus package:
If a second round of stimulus is necessary, other options that should be on the table. These include payments to states that will need to cut spending because of balanced budget provisions as their tax revenue falls. Additionally, policymakers should consider increased infrastructure investment on items such as roads and bridges.
Both of these are great ideas. Though they ask the question, is a second round of stimulus necessary? All I can say is look around.
Here in California the state budget impasse is rounding the track on its 6th week (they were supposed to have something figured out by July 1st.) Governor Schwarzenegger has been favoring scare tactics over real negotiation with state Democrats. Ask the 200,000 state employees who had their salaries reduced to minimum wage if they think a second round of stimulus is necessary. Ask the 10,000 plus seasonal and student workers who lost their jobs if they think a second round of stimulus is necessary.
In New York, Governor Patterson is calling the state legislator back into session to address a projected $6 billion budget gap next year and a gap that could ballon to $26 billion in three years. They say everything is on the table for cuts. I'm sure they could use a little help.
These are just two of countless examples of states in need of some aid. Here's to hoping that when Congress comes back into session next month they do so with the recommendations of Mr. Shapiro and Mr. Slemrod in mind.
(bumped, you gotta see Rangel... on the flip. - promoted by David Dayen)
Yesterday the House came very close to passing a bill extending unemployment insurance for 13 weeks. Under suspended rules they needed a 2/3 majority to advance the bill, and they came up 9 votes short. They might as well have gone for the 2/3 vote right away, because Bush is likely to veto the bill. And every rubber stamp from California's Republican House delegation voted with the President.
Bush claims unemployment is not high enough and the economy not bad enough to justify extending UI for workers who can't find new jobs. Yet the total number of long-term unemployed is higher than it was the last two times Congress enacted federal extension programs (October 1991 and February 2002). In addition, joblessness is growing. May saw the biggest one-month jump in the unemployment rate in more than 20 years.
Right now, some 1.55 million workers have used up their benefits without finding work and the Congressional Budget Office (CBO) estimates about 3.5 million unemployed workers will exhaust their benefits this year.
You can't come up with a more effective economic stimulus than extending benefits for long-term unemployed Americans who need it the most. That money gets directly injected back into the economy and makes far more sense than giving random $600 checks to everyone. It's targeting with a laser and not a cannonball.
"Voting to extend unemployment benefits to nearly 702,000 California workers is the very least Reps. Dreier, Bilbray, Bono, Calvert and Rohrabacher could do after voting time and again to enable President Bush´s failed policies that have contributed to and even exasperated the economic downturn," said Jeremy Funk, spokesman for Americans United for Change. "The U.S. economy is slipping further and further towards recession after five consecutive months of negative job growth. We understand that Reps. Dreier, Bilbray, Bono, Calvert and Rohrabacher believe that more Bush tax cuts for millionaires are the only prescription for the ailing economy - tax cuts that never manage to ´trickle-down´ to the people who really need it. But, we hope they can make an exception this time and vote to extend a helping hand to the Californians hit hardest by the Bush economy."
They chose to stand with Bush.
The Democrats are going to try this one again. It's so mind-bendingly simple that there's probably no way that these California legislators come to their senses and vote in the interests of struggling out-of-work constituents instead of the President they adore.
UPDATE: This just passed the House under normal rules (meaning it needed just a majority vote). The count was 274-137. Yesterday was 279-144, so a handful of Republicans took a walk today. Roll call isn't up yet...
...My bad, 274-137 is exactly a 2/3 majority, so they got this through under suspension of the rules. The roll call is up, and sure enough, all CA Republicans voted against it again. Challengers, feel free to blast your opponents.
I wrote last week about the failure of President Bush's economic stimulus package to stimulate anything beyond public opinion polls that prove its worthlessness and longer lines at food banks across California.
And with little of the stimulus package actually making it into the economy, states are still being forced to cut their FY2009 budgets to weather the slow economy.
The plight of states being forced to slash away at their budgets has been well chronicled this year, but on Sunday Louis Uchitelle wrote a piece in the New York Times about the broader implications of state cutbacks on spending. After highlighting the many crises caused by the economic failures of the Bush administration including a housing bust, credit crunch, shrinking level of consumption, rising unemployment and faltering business investment, they discuss one prop that's holding up our failing economy:
State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.
This article goes on to enumerate the kind of impact state budget cuts are really going to have on the economy:
At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles.
In some states like California, the budget cuts and their negative consequences are already set in stone.
“We are looking at a $4 billion cut to public schools and deep cuts that will result in thousands of Californians losing their health care,” said Jean Ross, executive director of the California Budget Project, offering a preview of coming hardships. “But the reality is we have not pulled money off the streets yet.”
But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment — slowly at first and then quite noticeably after the next president takes office.
The results of this slow down in spending could end up leaving little doubt as to whether or not the United States is in a full fledged recession:
Sometime next year, the decline will reach an annual rate of $50 billion, Goldman Sachs estimates. “It is a big reason to expect a weak economy in 2009,” said Jan Hatzius, chief domestic economist at the firm.
The $90 billion swing — from more spending to less — could be enough to push down a weak economy to zero growth or less, because state and city spending has accounted for as much as half of total economic growth since last fall.
Yet despite all of this there is a glimmer of hope if the federal government takes the proper course of action, which is hardly a given with the Bush administration. The answer is actually very simple:
...the next president, struggling to revive a weak economy, will almost certainly have to consider a second stimulus package.
But what should it be? Should it be a reprise of the checks, relying again on private-sector spending for rejuvenation? Or should Washington channel extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk? The answer, even on Wall Street, is often: subsidize the states and cities.
In creating the first economic stimulus package the government erred in assuming that the general public would spend most if not all of their rebate check and thus a significant portion of the stimulus package did not make its way back into the economy. In reality there is only one way to make sure that aid from the federal government gets spent. On giving money to the states:
“If you want to make sure that federal money gets spent, and jobs are created, you give it to them,” said Nigel Gault, chief domestic economist at Global Insight, a forecasting firm.
Like many others, Mr. Gault contends that more than 50 percent of the $107 billion in stimulus checks now going to households is likely to produce no stimulus at all. Instead, it will be used to pay down debt or buy imported goods and services. Imports bolster production in other countries; not in the United States.
Government has to step in, Keynesians argue, when private spending is not enough to lift the economy, despite the nudge from tax cuts or lower interest rates or rebate checks. This downturn might be one of those moments, involving as it does the bursting of a huge housing bubble. That has precipitated sharp declines in various tax revenues on which the states and cities depend, forcing them into extraordinary spending cuts.
The GOP propaganda machine would have you believe that the federal government stepping in with aid to the states would lead to nothing more than radical, out of control spending sprees on various projects that are not needed. Any rational person however would understand that this money would go towards ensuring states don't have to dramatically slash their budgets in a way that could wreck the economy, not starting new projects.
And for anyone who may be wondering which programs could use a little help, here is a great place to start.
Stateline.org wrote today about another potential crisis; unemployment benefits:
More than a dozen states would be hard-pressed to provide unemployment benefits if the economy tailspins into a full-blown recession and more workers get pink slips.
What happens if the unemployment trust funds run out of money? People will still get their benefits, it would just put an even heavier burden on the states:
If a state unemployment insurance trust fund runs out of money, unemployed workers would still get their benefits, but the state would have to borrow the money from the federal government and pay it back with interest. Such a scenario would burden those states that are already cash-strapped and borrowing heavily to balance their budgets without having to raise taxes.
This is not a small problem either, there are already four states in seriously trouble, and 14 more that could join them:
Michigan, Missouri, New York and Ohio could face the biggest problems since the amount of money in their unemployment insurance reserves already are far below recommended levels...
States that are also well below the recommended level with only about six months of money in their reserves are: Arkansas, California, Illinois, Indiana, Kentucky, Minnesota, North Carolina, New Jersey, Pennsylvania, South Dakota, South Carolina, Tennessee, Texas and Wisconsin.
Suggesting that the federal government do something to help the states with potential unemployment benefit crises is not outlandish. The program is already a joint federal-state program with joint funding by federal and state employer payroll taxes and the states administering the program. This also wouldn't be the first time that the federal government has stepped in to help the program. It was done in 2002 with considerable success
Most states’ UI trust funds weathered the 2001 recession, first because they went into the recession with more reserves than they have now. But Congress also helped in 2002 by transferring $8 billion from the federal UI trust fund to the individual state UI accounts.
If states are more strapped for funds now than they were in 2001, then it would seem that federal aid would be even more necessary today than it was 6 years ago. Especially if you factor in the slower economic growth rate and the number of people who are considered "long-term unemployed." Naturally this fact is lost on the Bush Administration. In today's episode of "inexplicable Bush administration economic policies that are destroying the country as we know it:"
Congress is once again considering helping states cover UI claims, but the measure has drawn a veto threat from President Bush, who has said such a move is too costly and premature.
Really? A move that would prevent the states from having to borrow money from the federal government at astronomical levels to balance the budget is too premature? The federal government can bail out Bear Stearns for $30 billion, but it can't provide states with the money they need to maintain unemployment benefits? Fortunately Congress doesn't have the same failed conservative talking points blinders on as the Bush Administration:
Before recessing for the Memorial Day holiday, the U.S. Senate passed, by a veto-proof margin, a measure that would extend unemployment benefits by 13 weeks for all workers and provide an additional 13 weeks for workers in high unemployment states. Unlike traditional UI benefits that are financed through federal and state payroll taxes, the federal government would pay for all of the extended UI benefits, estimated to cost $11 billion.
Thankfully there are some out there who understand the true role of the federal government is to step in when the states need it to the most, and right now state and local governments are cash strapped and desperately trying to avoid slashing essential services and programs out of their budgets. Let's hope more bills like this become the prevailing wisdom on Capitol Hill.
