Fifty Ways To Kill Recovery

[Guest Aloysius]

This article makes some good points about how federalism actually makes recovering from this economic downturn more difficult. Besides the public's distaste for more spending on the federal level, states are now being forced to cut back on spending precisely when more is needed: both to stimulate the economy and help the growing number of Americans in need.

 

Fifty Ways To Kill Recovery

by James Surowiecki

 

If you came up with a list of obstacles to economic recovery in this country, it would include all the usual suspects—our still weak banking system, falling house prices, overindebted consumers, cautious companies. But here are fifty culprits you might not have thought of: the states. Federalism, often described as one of the great strengths of the American system, has become a serious impediment to reversing the downturn.

 

It’s easy enough, of course, to mock state governments nowadays, what with California issuing I.O.U.s to pay its bills and New York’s statehouse becoming the site of palace coups and senatorial sit-ins. But the real problem isn’t the fecklessness of local politicians. It’s the ordinary way in which state governments go about their business. Think about the $787-billion federal stimulus package. It’s built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.

 

Now, state cutbacks have not been as severe as they might have been, thanks to the stimulus plan, which includes roughly $140 billion in aid to local governments. That aid, according to a recent study by the Center on Budget and Policy Priorities, has covered thirty to forty per cent of the states’ budget shortfalls. Money for the states translates directly into jobs not lost and services not cut—which is why you can make a good case that more of the stimulus should have gone to state aid. Yet there’s no sign that those budget gaps are getting smaller, and, as the federal money runs out, state tax increases and spending cutbacks are only going to become more common. In the midst of this downturn, some of the biggest players in the economy—state and local governments together account for about thirteen per cent of G.D.P.—will be doing precisely the wrong thing.

 

Fiscal federalism also makes it harder to spend the stimulus money efficiently. Much of the tens of billions of dollars that will be spent on roads, for instance, will be funnelled through the states. As a result, a disproportionate amount of the money will be spent in rural areas (which exert disproportionate influence on state governments), leaving cities—which happen to have most of the people and most of the traffic—shortchanged. The top eighty-five metropolitan areas in the country are responsible for about three-quarters of the country’s G.D.P. Yet less than half of the road money will be invested there. The billions in stimulus money that’s going to high-speed rail will likely be spent more sensibly, since the Obama Administration has placed a premium on interstate coöperation in building the network. Still, whether we end up with true regional, let alone national, rapid-transit networks will depend largely on decisions made at the state, rather than the national, level. In other words, you may be able to get from Miami to Orlando quickly, but it could be a slow train (at best) to the rest of the country.

 

Even more important, federalism is getting in the way of the creation of a “smart” American power grid. This would involve turning the current hodgepodge of regional and state grids into a genuinely national grid, which would detect and respond to problems as they happen, giving users more information about and control over their electricity use, and so on. It could also dramatically reduce our dependence on oil. Wind power could eventually produce as much as twenty per cent of the energy that America consumes. The problem is that the places where most of that wind power can be generated tend to be a long way from the places where most of that power would be consumed. A new grid would enable us to get the power to where it’s needed. But since nobody likes power lines running through his property, building the grid would require overriding or placating the states—and the prospects of that aren’t great.

 

The tension between state and national interests isn’t new: it dates back to clashes in the early Republic over programs for “internal improvements.” Of course, the federal government is far bigger than it once was, and yet in the past two decades we’ve delegated more authority, not less, to the states. The logic of this was clear: people who are closer to a problem often know better how to deal with it. But matters of a truly interstate nature, like the power grid, can’t be dealt with on a state-by-state basis. And fiscal policy is undermined if the federal government is doing one thing and the states are doing another. It’s a global economy. It would be helpful to have a genuinely national government.

[Legacy Fan]

As a result, a disproportionate amount of the money will be spent in rural areas (which exert disproportionate influence on state governments), leaving cities—which happen to have most of the people and most of the traffic—shortchanged.

 

Is this an assumption? The way it is/has been?

 

 

Do we need anymore evidence that this "stimulus" was poorly planned/timed? I would hope not. See what happens when "we just have to do something" actually gets listened to, rather than reason, and planning.