Economic Stimulus RX: More State Spending
With new Commerce Department data confirming that the US economy is growing at a level well below historical averages, policymakers are asking what else they can possibly do to jump-start the nation’s economic engine. In today’s New York Times, Louis Uchitelle points out that Congress has, so far, ignored one important tool in our collective economic toolbox: “chanel[ling] extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk.”
This argument is pretty basic– if states have to pare back their budgets, they’ll cut spending on education and transportation and will reduce state employment in these areas, so giving states emergency fiscal relief will allow states to keep these jobs– but it isn’t new. As Uchitelle points out, Keynesians have long argued that government spending can be an effective option for digging out of economic downturns. And this position has had an eloquent advocate already this year in Columbia University’s Joseph Stiglitz, who argued back in January that the best federal “stimulus” plan would include:
giving money to states and localities that are facing real financial constraints. Tax revenues are going down. Property values are going down. And most states have a balanced budget framework.
So if the revenues go down, they have to cut their expenditures. And this will depress the economy. So dollar for dollar, this will stimulate the economy enormously.
The common-sense point being made by both Uchitelle and Stiglitz is that government spending, just like private spending, boosts our economy. It’s a point that is too often forgotten by policymakers who (whether they realize it or not) are still in thrall to the Reaganite notion that nothing good ever came out of government. Folks in Congress who ought to know better have been falling all over themselves this year to put “extra” money in the hands of individual consumers, with the hope that they will spend it and thereby boost the economy, but have given little thought to the idea that state governments can provide a similar stimulus of their own.
There’s some hope from the ongoing presidential debate, according to Uchitelle, in that at least one party’s candidates are singing the Keynesian tune (if slightly off key):
The Republicans in particular are less than enthusiastic about Keynesian economics, with its use of government to rescue markets. They, and many mainstream economists, for that matter, argue that government is inefficient, bureaucratic, wasteful and unable to spend fast enough to counteract a downturn. The two Democratic candidates, in contrast, argue that a second stimulus package, if one is needed, should include federal subsidies to the states and municipalities, not to start new projects but to prevent cutbacks in existing ones.
But this idea certainly isn’t a central plank of either Democratic candidate’s platform. And even abstracting from these political difficulties, there’s a basic policy problem that makes the Uchitelle/Stiglitz solution a hard sell: what Uchitelle breezily refers to as “extra federal money” is in pretty short supply right now. Until someone at the federal level can stomach the notion of admitting that federal taxes are simply too low to meet our needs, any federal grants to state governments will essentially be paid for by borrowing money from our creditors overseas. The federal government can absolutely come to the aid of states through a new regime of stimulative grants– but the positive long-term impact will be less clear if this federal spending is paid for by our grandchildren.
Make the Tax Cuts Work
New York Times, January 23, 2008 – Since 2001, official Washington’s answer to every policy question has been the same. What should we do with a big surplus? Tax cuts. How do we beat back global terrorism? Tax cuts. Increase energy independence? Rebuild New Orleans? Expand health insurance coverage? Tax cuts, tax cuts, tax cuts. Now comes another question to which taxes have long been at least part of the answer. How do we stimulate the economy to prevent or shorten a recession?
Breaking News: Higher Energy Prices Will Cut Demand
Nice to see Tom Friedman on the energy tax bandwagon. As he wrote in his Dec. 27 New York Times column, “I’ve wracked my brain trying to think of ways to retool America around clean-power technologies without a price signal—i.e., a tax—and there are no effective ones.”
Friedman needs to give his cranium a holiday break. Policymakers have been searching for this magic bullet for years, without success. They’ve tried government-mandated (CAFE) auto mileage standards, tax credits for the use of everything from hybrid cars to low-E windows, massive government subsidies for production of alternative fuels and sincere pep-talks from sweater-clad Presidents. Nothing has worked. Take a look at this chart from the Energy Information Agency:
As it shows, the only break in the steady growth of fossil energy use over the past half-century came with the oil price shocks of the 1970s and 80s. Friedman has discovered a pretty basic rule of economics: If you want people to buy less of something, raise the price.
For another example, take a look at some charts Diane Rogers over at Economistmom.com put together that show what happens, at least in the short run, when gasoline prices change dramatically. We’ve run a nice little natural experiment and the results are fascinating. When gasoline prices exploded last summer, demand plunged. You might say that $4-a-barrel gasoline focused the mind. Then, as prices plummeted over the past few months, consumption again rebounded, even with the economy in the tank.
It is a bit more evidence that consumers of energy will change behavior in response to price. Most economists think it takes a while for people to react, but react they do. CBO figures a sustained price increase of 10 percent will eventually cut consumption by about 4 percent. Others think the long-run response may be even stronger.
Sooner or later, however, if you use a tax to push up the price of energy, people will buy more fuel-efficient cars, appliances, and even homes. They may even think twice about buying that oversized mini-mansion 40 miles from work.
So far, Barack Obama’s transition team has been troublingly mum about raising energy taxes, even though he embraced a tax-like cap and trade program for fossil fuels during the campaign. Aides have dropped broad hints about a new round of big new government subsidies to develop alternative fuels and using a chunk of stimulus money to pay for mass transit. And, of course, Washington has made $25 billion available to automakers for energy R&D and pressed them to make new fuel-efficient cars in return for the additional bailout money they just got.
Giving away money to encourage green behavior is the easy stuff. But it will take more than that. I know, we are in a recession and can’t raise taxes right away. But with gas prices again south of $2.00 a gallon, it is folly to think many consumers will eschew a gasoline-powered $20,000 car for a $40,000 electric ride. Consumers are not dumb, and forcing automakers to build those cars in the absence of demand is madness. So is talking about energy independence without raising the price of fossil fuel.
Canary in the Budget Coal Mine
States have reported worsening budgetary situations for months now and governors, faced with annual balanced budget requirements, have ordered repeated rounds of fiscal belt tightening. On Monday, a New York Times story revealed another symptom of states’ financial problems: the depletion of funds to pay unemployment compensation.
Thirty states are within a few months of exhausting their funds (see Times graphic). Indiana’s fund went belly up last month and the state has already borrowed twice from the federal government to cover benefits. Michigan, the poster child for economic collapse, has used federal funds to pay unemployment compensation for years and is on the hook to repay more than half a billion dollars. More states are lining up at the federal borrowing window.
Funding problems stem in part from poor planning. Many states cut unemployment taxes when the funds were flush, reducing surpluses. Now some states are boosting taxes on employers at a time when many firms are already hard-pressed to meet their obligations. By raising firms’ labor costs, higher taxes could cause even more job losses.
Funds financing unemployment compensation are separate from states’ general budgets and states do not move money between the two uses. But as states struggle to balance their budgets, unemployment-compensation funds may serve as the canary in the budget coal mine where state finances threaten to implode.