"Fifty little Hoovers
- Posted by:
- Economist.com | WASHINGTON
- Fiscal policy
PRESIDENT OBAMA is making news today in announcing an acceleration of planned stimulus spending for the summer. The administration will push to ramp up spending in coming months, in an effort to create some 600,000 new jobs. The money will go toward public works and school budgets, among other things, and it is expected to reinforce improvements in the economy with a concentrated bang.
That's all fine, so far as it goes, but it's worth pointing out that the federal government's stimulus will have to work fairly hard simply to arrive at a net expansionary position for government as a whole. State governments do not have the federal government's freedom to borrow, and therefore fifty little Hoovers find themselves needing to cut spending and raise taxes sharply to balance budgets. Needless to say, this is damagingly pro-cyclical policy.
How bad are things? James Kwak points us to slides from a recent presentation given by Don Boyd at the Chicago Fed, which include some revealing charts. Under an optimistic economic scenario and with the stimulus in place, states nonetheless find themselves with small budget gaps to close in 2009 and 2010. Under a more pessimistic scenario, those gaps begin to get quite large; even with the stimulus the budget gap approaches 4% of revenues in 2010. That means that despite the billions of dollars being allocated to states through the stimulus plan, state governments will need to lay off employees, cut services, and kill planned projects. That's like punching holes in the bottom of a boat, even as the government seeks to bail it out.
More disturbing still are projections for budget gaps in 2011 and beyond—after the impact of the stimulus wanes. Longer-term gaps in the optimistic scenario begin to resemble the short-term gaps in the pessimistic scenario, and longer-term gaps in the pessimistic scenario grow very serious, indeed—a shortfall approaching 8% of revenues opens up. What this suggests is that in the absence of follow up stimulus, fiscal policy won't simply cease being expansionary, it will become actively and aggressively contractionary.
I never did understand why the stimulus didn't focus more heavily on direct aid to states. The House version of the bill was much more generous to states than the Senate version, where for some reason, moderates of both parties and conservative Senators agreed that state aid was a bad idea. Given the extent to which many government services and projects are managed at the state level, continued federal aid to budget-constrained state governments right through recovery seems like a no brainer. Attach strings if you want, but don't let the governors undo the work being done at the federal level."Me:
Don the libertarian Democrat wrote: