Stimulus Working as Intended to Plug State Budget Holes, But It’s Not Enough
Clearly the overall national economy is performing worse than all of us had hoped, and worse than the administration forecast in its official projections. This is, naturally, leading to a lot of “stimulus failed” type of talk. But when you bore in and look at it, the stimulus is pretty clearly making a difference for the better. This useful report from the Center on Budget and Policy Priorities demonstrates that stimulus funds are sharply reducing states’ needs for tax hikes or budget cuts. Here’s Virginia, for example:
I think stimulus critics have been remarkably blind to the dynamics here. Certainly conservatives don’t seem like the kind of folks who’d deny that steep tax hikes amidst a recession will make things work. But tax hikes are, obviously, one way to plug a hole in state budgets. And sharp state spending cuts have the same pro-cyclical impact. I’ve heard people say that the problem with stimulus is that it ignores the need for the economy to make structural adjustments. But huge state budget cuts don’t make structural adjustments easier, they simply increase the quantity of structural adjustments that are needed. And the biggest impact of federal stimulus spending has been to reduce the need for such cuts. And yet if you look at any of these state pie charts what you see is that stimulus money, though helpful, has not been adequate to fully plug the hole. The result is a situation, not only the situation prevailing during the Great Depression, when it’s not clear that the public sector is providing much if any overall stimulus when you account for state and local budgets. What we can say is that absent federal stimulus, overall fiscal policy would be sharply pro-cyclical at the moment plunging the country into deeper recession.
16 Responses to “Stimulus Working as Intended to Plug State Budget Holes, But It’s Not Enough”
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July 10th, 2009 at 10:49 am
Actually if you ask conservatives I bet they’d say, let’s finally get rid of taxes and watch the gush of funds coming in from all the economic growth–they’d more than pay for themselves and fill the budget gap.
July 10th, 2009 at 10:58 am
worse
Just for those who can’t worse it out for themselves.
July 10th, 2009 at 11:00 am
Um, without taxes it is impossible to reduce a budget deficit, no matter how much growth results. Well, unless your state government owns a lot of oil fields…
July 10th, 2009 at 11:02 am
I don’t think Matt’s proofreading can get any work…
July 10th, 2009 at 11:09 am
MY seems to look at the stimulus as a way of saving public sector jobs. I thought it was supposed to stimulate, i.e., increase demand in such a way as to prompt the creation of all kinds of jobs in both the public and private sectors. Has the idea of a Keynesian multiplier been abandoned?
July 10th, 2009 at 11:17 am
No, he’s simply pointing out that eliminating public jobs during a recession is procyclical and therefore works directly counter to expansionary Federal fiscal policy.
July 10th, 2009 at 11:20 am
It’s pretty much established that people here, think business, profits, and tax revenues, have no relationship to each other.
July 10th, 2009 at 11:22 am
Too small and too many strings. States are just now understanding how to use the State Fiscal Stabilization Funds that were announced mid-February. As a result, almost none of this money has gone out the door.
Another thing to think about is that most states are NOT expected to see revenues rebound in two years’ time. What happens when the stimulus money goes away, but state finances have not improved at all? Will this secondary cut to state finances lead to a secondary recession? Or will Obama come through with more stimulus?
July 10th, 2009 at 11:32 am
Actually if you ask conservatives I bet they’d say, let’s finally get rid of taxes and watch the gush of funds coming in from all the economic growth–they’d more than pay for themselves and fill the budget gap.
Conservatives have brought us to our current situation. Obama is just trying to deal with it. He’s been in office 6 months and Republicans are trying to blame him. Come on.
We averted going over the cliff (krugman says the bond panic is subsiding)
http://krugman.blogs.nytimes.com/2009/07/08/bond-panic-subsiding/
The banks are raising capital even with their toxic assets.
But yeah from now on, it should be take for granted that state governments will be pro-cyclicle to a huge degree.
July 10th, 2009 at 11:46 am
A partial answer to why the stimulus hasn’t been more effective is the run-up in oil prices since January due to speculation. That oil price increase has sucked up much of the stimulus money. The CFTC could stop it by reducing the relative role of speculators.
Congress was set to require the CFTC to re-regulate oil futures trading last term, but Bush’s veto threat stalled that. Obama could have ordered the CFTC to re-regulate without new law, but he hasn’t. Instead the CFTC is set to hold hearings on a settled question. IMHO, this is just a stall tactic to give Goldman-Sachs, et al time to adjust.
Obama’s ties to wall street are defeating part of the stimulus effort.
July 10th, 2009 at 11:53 am
“Conservatives have brought us to our current situation.”
To the extent that the above statement is true, it is only because these alleged conservatives have bought into:
1. Krugmanite-Keynesian ecnomic policy; and
2. Democrat Wilsonian foreign policy.
July 10th, 2009 at 12:15 pm
@11 Bob Roddis: “2. Democrat Wilsonian foreign policy.”
The idea that gleefully fighting two wars, one of them a war of choice, overtly despising the United Nations, while also aggressively and purposely alienating allies and every other nation in the world, represents Wilsonian foreign policy is the single goofiest thing I have ever heard.
Kudos, sir. You have entered my pantheon at Number One.
July 10th, 2009 at 12:35 pm
I think stimulus critics have been remarkably blind to the dynamics here.
I think you’re imagining some stimulus critic who agrees with Keynesian theory, but somehow has criticisms about this specific stimulus. And I’m sure that you know many such people. But the people I would regard as real stimulus critics are those who don’t agree with Keynes, and for them the ‘dynamics’ here are that you’ve moved money from one bucket into another in an attempt to preserve the existing misallocation of resources.
Given that there seems to be a strain of thought that portrays the state governments as myopic skinflints who *should* be pursuing Keynesian policies but refuse (see: ‘fifty little Hooevers’), I also think it’s worth pointing out that the Federal Government is only able to perform its feats of deficit spending because it has special powers. Namely, the ability to monetize its debt thru the Treasury and Federal Reserve. If the states were similarly able to mint their own money I’m sure many would do so. As it stands, those that try their hand at federal-level deficit spending will end up like California, with a junk bond rating and no way to borrow.
July 10th, 2009 at 2:24 pm
1. Krugmanite-Keynesian ecnomic policy; and
2. Democrat Wilsonian foreign policy.
That’s me. Except that fuckwits like “Not as Stupid as Will Allen” believe #2 = the desire to mass murder foreigners. How do they square their “realism” with the isolationism of the paleoconservative heartland?
And why shouldn’t one be idealistic about policy, foreign or domestic? Otherwise you’re a callous selfish bastard.
July 10th, 2009 at 2:25 pm
“But tax hikes are, obviously, one way to plug a hole in state budgets. ”
Except in California, where Grover Norquists are about to succeed in killing state government. (Though, to be fair, until people put blame where it belongs, there won’t be change here. And people aren’t willing to raise hell or push for the repeal of Prop 13–any part of it.)
July 11th, 2009 at 12:03 am
MY seems to look at the stimulus as a way of saving public sector jobs. I thought it was supposed to stimulate, i.e., increase demand in such a way as to prompt the creation of all kinds of jobs in both the public and private sectors. Has the idea of a Keynesian multiplier been abandoned?
Direct public spending (on wages or anything else) has a “multiplier” effect because the recipients of that spending then spend some more themselves (and the recipients of that additional spending then spend some more themselves, and so on until the ripple effect dampens out). I don’t see where Matt is abandoning this theory.