The single most perverse thing about the Senate version of the stimulus package is that it made big reductions in federal aid to the states. In economic terms, this was just about the least-controversial idea you could put in a stimulus package. On the federal level, a recession leads to a reduction in tax revenues and an increase in expenditure on social welfare services. This creates an “automatic stabilizer” effect on the fiscal side of the equation. The combined efficacy of automatic stabilizers and monetary policy is one of the main reasons why we don’t normally see big fiscal stimulus packages to combat a downturn. But we’ve already done everything we can with conventional monetary policy, so we’re looking at fiscal policy.
Perhaps the most obvious thing to do in fiscal policy terms is to extent the automatic stabilizer effect that you see on the federal level down to the state level. Since states need to balance their budgets, recessions normally force them to engage in pro-cyclical cutbacks rather than counter-cyclical expansions. But the federal government can borrow money on states’ behalf to help them plug the gap. This is a good idea and it was in the House bill. On this morning’s Meet The Press, Barney Frank slammed the cutback on this state fiscal aid, observing “Money to go to the states to stop them from laying off cops and firefighters, money to help keep teachers going. Those are jobs.” Ali Frick reports that Senator John Ensign was having none of it:
Ensign (R-NV) — who began the show by saying that doing nothing would be better than passing this stimulus plan — insisted that states’ budgets are “bloated” and derided Frank’s concerns as “fearmongering,” denying that any teachers, cops, or firefighters would lose their jobs:
To get back to what Congressman Frank said, is that we’re going to be laying off teachers and firefighters. You know, that’s just fearmongering. We’re not going to be doing that in any of the states. … [The states’] budgets are bloated, the federal government’s budget is bloated. What we should be doing is cutting back.
The idea that it would be good for states to cut back in the midst of the recession is stupid. The idea that the recession won’t, absent federal aid, lead to layoffs of state employees such as teachers and firefighters is also stupid. But the idea that it’s simultaneously true that the reason we should eschew aid is that states need to cut back and also true that it’s fearmongering to warn of layoffs is doubleplus stupid. What does Ensign think cutbacks consist of? States will be reducing vital services. The cutbacks will have the immediate impact of reducing the incomes of laid-off families and beneficiaries of state programs. That will have an additional impact on businesses where the newly laid-off teachers and cops used to work.
And the reduced level of service will have its own bad economic impacts. Cutting back public safety budgets will mean fewer cops on the beat. That means more crime which will further reduce economic activity. State cutbacks to child care subsidies will make it harder for people who lose jobs to find and accept new ones. The cutbacks to mass transit services that are happening across the country will introduce additional rigidity into the labor market and reduce patronage of businesses that people are accustomed to reaching via transit. And in the most severe cases, cutbacks in assistant to the severely impoverished will have a decades-long impact on the well-being of their children.
In Ensign’s home state they’re talking about a fifteen percent cut in K-12 education. Does Gibbons really think that can be implemented without a detrimental impact on Nevada’s citizens and local economy?