New York to self: Drop dead

President-elect Obama and Congress are talking about a federal stimulus package that includes a substantial though as-yet-undetermined amount of aid to states and, possibly, localities.  Earlier this month Ohio Gov. Ted Strickland made an eloquent case for still more federal aid, to make up for more of the huge shortfall in revenues that normally go to education:

“It doesn’t make a lot of sense … to put huge resources into creating jobs with these infrastructure projects, while at the same time the states are having to lay off teachers, and to underfund education and to allow college tuition to explode.”

According to the Associated Press, Strickland and four other Democratic governors, including David Paterson of New York, presented Obama’s transition team and Congressional leaders with a request for $1 trillion in state aid, including $250 billion for education, $250 billion for social services such as Medicaid, and $150 billion in middle-class tax cuts.   The article mentions that Paterson said New York has a $15.4 billion deficit, but that’s it from him.  New York, as possibly the hardest-hit state in the union in this financial and economic crisis, has a compelling case for why the states have recession-related revenue shortfalls and could use federal aid.  Maybe Paterson made that case, but if so it didn’t make the article.

One more time: Don’t stiff the states!

A recent Associated Press article about the forthcoming Obama stimulus plan is somewhat encouraging on the state-aid front.  I’ve been arguing vociferously that any stimulus package that doesn’t include massive aid to states and localities is a sucky stimulus package.   Basic services like schools depend on state and local tax revenues, which have taken a beating during the current slump.  The article’s emphasis is mostly on infrastructure projects, but here’s a glimmer of hope:

“In addition, states would get up to $200 billion over two years for Medicaid health coverage for the poor and to narrow state budget gaps, which are forcing layoffs and cuts in services.”

Up to $100 billion per year …  Is that good?  It looks like a lot, but I’ve yet to see a projection of the combined deficits of the fifty states plus D.C.

Another glimmer of hope, on the schools front:

“Obama’s vision of infrastructure goes beyond repairing or building roads and bridges. It includes modernizing schools, boosting high-speed communications networks and installing technology at hospitals and doctors’ offices to electronically access medical records.”

So far, so good.  But still, almost all the talk is about rebuilding our infrastructure.   We see it again in this Dec. 28 op-ed by Larry Summers, which just barely hints that some of the stimulus money might be directed at schools and basic health-care services (and does not mention general state aid at all).  Not that there’s anything wrong with infrastructure, but it almost seems like Obama advisers feel like it’s politically perilous to talk about aiding the states, as if the average American is going to blame the states for their woes (a la the Big Three automakers and the unpopularity of the bailout).  To be sure, there are a lot of people out there who have that “I say,  let ’em crash” mentality, but that’s all the more reason to make the case for aid now.

UPDATE, Dec. 30:  I posted this on Sunday (and had made a similar point in “Fiscal Policy in the Oughts” a week earlier), and voila, Paul Krugman’s NYT column on Monday, titled “Fifty Herbert Hoovers,” says the same thing!   Thanks for reading, Paul.  I kid, I kid — no such delusions of grandeur here.  As comedian Owen Benjamin put it when asked about comics stealing each other’s material, there’s only so many premises out there.

Fiscal policy in the oughts

Everyone’s expecting some fairly big fiscal stimulus bill to emerge early next year from Congress and to be signed by President Obama, but let’s not forget about what’s happening right now at the state level.  Most states are constitutionally required either to pass a balanced budget or to have their governor submit one, so right now the talk in the statehouses, notably here in New York State where I live, is all austerity all the time.

Austerity budgets — draconian spending cuts, tax increases, or some combination thereof — are the last thing any economy needs during a recession.  The backfiring “Hoover” tax increase of 1932 is forever held up as one of the Lessons From the Great Depression.  Another lesson, familiar to economic historians though not so much the general public, is that the overall fiscal stimulus during the 1930s was actually quite small, as the New Deal deficits (which were actually not that huge in relation to the economy, as Paul Krugman reminds us) were largely offset by budget-balancing efforts at the state and local level.  (The classic reference is E. Cary Brown’s “Fiscal Policy in the Thirties,” American Economic Review, 1956.)

This point about the government’s overall fiscal thrust might be even more important now than in the 1930s, when much if not most of the (partial) recovery of 1933-41 came from monetary expansion, mostly in the form of gold inflows from Europe.  (Christina Romer, the incoming Chair of the Council of Economic Advisers, has an article about this, “What Ended the Great Depression?”, in The Journal of Economic History.)  Right now, by contrast, the Fed is trying everything and then some, and doesn’t seem to be able to get the economy going again.  So it may be up to fiscal policy.

Right now it seems to be mostly talk at the federal and state levels.  The White House and Congress are in lame-duck mode, so nothing very concrete is being proposed.  State legislatures are home for the holidays, and in states like mine where the governor has to submit a balanced budget but the state doesn’t have to pass one, there’s even less certainty.  My take is that the federal stimulus package should not skimp on aid to state and local governments.  For all the dysfunction of some state governments (like my own), their budgets reflect the needs and priorities of their people to at least some degree, and ignoring them just seems like bad policy.  (I remember, when Clinton was getting started in 1993 and talking about an economic stimulus plan, hearing David Gergen deride the new president’s planned aid to state and local governments as “walking-around money for mayors.”  I’m sure those kinds of dismissals will be common in the halls of Congress in 2009.)

My nightmare is that Congress passes a “Washington Knows Best” stimulus package that mostly stiffs the states and instead puts the funds into projects of its own choosing.  Thousands of Bridges to Nowhere, and fifty state governments in distress.  If that happens, the recession could be a long one, and could feel like a depression for anyone who works for a state or municipal government.