June 01, 2008

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.


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