| Note: I'm greatly encouraged by the news that the Collins-Nelson betrayal may be cut off at the pass. But just to make sure we all understand just how bad their proposal is, I'm posting this diary anyway.
To be effective a stimulus requires four things: (1) that it be quick, (2) that it be effective, (3) that it avoid counterproductive measures, (4) that it be sustained long enough for the economy to fully recovery before being phased out. So far, the Blue Dogs have focused on making sure the stimulus will fail because of #4 (insisting on immediate reimplementation of PayGo). Now Collins-Nelson are going to war against #s 1-3.
(1) State spending is quick: So quick that if Congress doesn't give them this money by President's Day, they'll start cutting it from the budgets they are working on now.
(2) State spending is effective: As shown in my diary, "Stimulus Reality: Spending Creates VASTLY More Jobs Than Tax Cuts", "General Aid to State Governments" produces 920,000 jobs per $100 billion in spending, compared to 200,000 jobs created by cutting corporate taxes by $100 billion.
(3) Allowing state government spending to plummet is directly counter-productive to the intent of the stimulus package. "Cuts in state and local government outlays are sure to be a substantial drag on the economy in 2009 and 2010," Moodys.com Chief Economist Mark Zandy wrote in his analysis, "The Economic Impact of the American Recovery and Reinvestment Act Mark Zandi - January 21, 2009" [PDF]. During the Great Depression, state public works spending plummeted so severely that it completely offset the increases in federal spending for the first three years of the New Deal (1933-35). This was a major impediment to recovery.
Expanded, with charts & graphs on the flip. |
| It's ironic that the self-described "fiscally responsible" centrist "grownups" would be the authors of such an incredibly ill-informed, destructive attack on state governments and schoolchildren. But, then, that's what bipartisans do: support Bush's war, give massive bailouts to Wall Street, ignore global warming and take money away from schools.
Here's an expanding explanation of how the Collins-Nelson's cuts severely damage the effort to create an effective stimulus, by undercutting the first three things a stimulus requires to be effective--(1) that it be quick, (2) that it be effective, and (3) that it avoid counterproductive measures:
(1) State spending is quick: So quick that if Congress doesn't give them this money by President's Day, they'll start cutting it from the budgets they are working on now. This need for quick action was explained to me in late December by Michael Bird, federal affairs counsel for the National Conference of State Legislatures. (NCSL). Indeed, states have already cut their spending substantially and will do so much more aggressively if they don't get federal assistance quickly. An article I wrote for Random Lengths concluded like this:
"During the 2001-2005 downturn, the cumulative gap [for all states] was $231 billion. This budget gap, for 2009-2010 is already nearing $200 billion," said NCSL federal affairs counsel Michael Bird. He expects that gap to grow further as new figures are compiled in the next two months, producing a nearly equal gap in less than half the time compared to the first Bush downturn.
That earlier crunch was the worst ever, NCSL staff explained at the time, because state governments didn't have nearly as a large social spending budgets in the Great Depression as they did by 2001. This time will be even worse, Bird explained.
First, the financial collapse has undermined the capacity to sell bonds and borrow money, hurting states directly and indirectly. Here in California, the state's Pooled Money Investment Board, which manages state spending, voted Dec. 17 to halt construction outlays for six months-this in a state economy that's lost over 118,000 construction jobs in the last two years.
"The infrastructure work so vital to getting our economy back on track will be crippled," said California Treasurer Bill Lockyer.
A second difference from 2001 and earlier downturns is the collapse of property values, the tax base for a great deal of local government. "So the states are not in a position to help out the local governments," Bird explained.
State governments start work on their budgets this week, and many have deadlines from March through April, so rapid congressional action is essential for federal assistance to be assured in time.
"If you treat this situation the way you would a natural disaster--and I believe you should do that--then they [Congress] have shown that they can get things done."
"Timing is really one of the major elements," Bird said. "This puppy has to be done by Washington's Birthday."
If states do not get the education assistance they need, the cuts will come in other areas as well. As noted in the passage above, California already halted construction spending months ago, for example.
(2) State spending is effective: As shown in my diary, "Stimulus Reality: Spending Creates VASTLY More Jobs Than Tax Cuts", in the chart republished below, "General Aid to State Governments" produces 920,000 jobs per $100 billion in spending, compared to 200,000 jobs created by cutting corporate taxes by $100 billion.
Even the most effective tax cuts, a payroll tax holiday, falls almost 70,000 jobs short of the bang-for-the-buck that aid to the states produces. Education is the most significant single item in state budgets. I've got a call into Moodys to see if I can get a breakout for education by itself, but till then, the "general aid" figure provides a very reasonable ballpark figure.
In short, if Collins, Nelson and their silent partners really wanted to be responsible and effective, they'd go after the least effective tax cuts--those business, in particular, and leave state spending alone--either that, or increase it.
(3) Allowing state government spending to plummet is directly counter-productive to the intent of the stimulus package. "Cuts in state and local government outlays are sure to be a substantial drag on the economy in 2009 and 2010," Moodys.com Chief Economist Mark Zandy wrote in his analysis, "The Economic Impact of the American Recovery and Reinvestment Act Mark Zandi - January 21, 2009" [PDF]. To show how severe the shortfall in state spending was, he included the following chart:
During the Great Depression, state public works spending plummeted so severely that it completely offset the increases in federal spending for the first three years of the New Deal (1933-35). This was a major impediment to recovery.
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