Magazine article The American Prospect

States of Distress

Magazine article The American Prospect

States of Distress

Article excerpt

Economic growth declined by only 1 percent from April through June, compared to 6.4 percent in the first quarter--in these times that passes for good news. Without the Obama stimulus of $787 billion, the damage would be far worse. But there are two areas of the economy where still-deteriorating conditions require more federal intervention. One is unemployment--9.5 percent and heading for double digits. The other is the condition of state and local government.

Most state constitutions require balanced budgets. So in a recession, when revenues fall, states are compelled to behave perversely. They cut program outlays just when public needs increase. They lay off workers, defer projects, raise taxes, and resort to budget gimmicks that are bad policy in their own right.

What's needed is a second stimulus, mainly in the form of emergency aid to the states. This idea is about as radical as Richard Nixon, who first proposed general revenue sharing in 1970.

This approach requires no advance planning. It simply prevents deeper cuts. The federal government just writes 50 checks, one for each state. Participating states have to commit to "maintenance of effort"--maintain their taxing and spending policies as of a particular date, say Jan. 1, 2009. The tonic effect of this approach is almost instantaneous, since cuts and layoffs are prevented, suspended projects and programs are resumed, and laid-off workers are recalled.

According to the Center on Budget and Policy Priorities (CBPP), the carnage in state budgets will worsen. All but two states face budget shortfalls for fiscal 2010, which began July 1, totaling $163 billion, on top of the $111 billion from the fiscal year that just ended (too bad the two exceptions are Montana and North Dakota, home to influential Democratic deficit hawks Max Baucus and Kent Conrad). The three-year state revenue chasm, 2009-2011, is projected at $454 billion, of which the Obama stimulus package replaces perhaps one-third.

That leaves a $300 billion hole. Stimulus II should provide that--and more. About 1.5 million workers are about to exhaust their unemployment benefits. The cost of extended unemployment coverage should be federalized. The states will also need increased help with health coverage for the uninsured, whose numbers are rising with budget cuts and unemployment. Even if the proposed Obama health insurance reform survives relatively intact, it is not scheduled to take effect until 2013.

The primary benefits of this policy are macroeconomic--saving jobs, preventing program cuts, and making sure that states don't worsen consumer purchasing power by regressively raising taxes in a recession. …

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