Tuesday, October 18, 2011

Automatic, So Automatic

Ezra Klein this morning lays out the case for aid to state and local governments targeted to teachers as justified by the extraordinary unemployment situation:
It's a "now-and-hopefully-never-again" idea. Of all the things you could do with federal dollars, helping state and local governments rehire people they have fired or expand their public-safety payrolls seems like the most absurd. In normal times, if the public-sector is downsizing, that's probably a good thing. But this is not a normal time.
That's reasonable, but I think there's a different and better case to be made for this sort of thing as a standard tool during all recessions, not just the unusual present one. I'm not sure why Klein believes that the public sector at the state and local level is inherently too large; I'd think that the federal government should be, probably, relatively neutral about that. But regardless, the long-term problem here is that since state governments can't run deficits, they're prone to boom and bust cycles, with perverse consequences: during recessions their revenues shrink automatically with decreasing economic activity, which then forces them to lay off employees, which in turn decreases economic activity.

Now, states could budget for recessions; the flip side of this is that their revenues soar (again, automatically) when the economy booms, and they could all be responsible about putting away that money for the future. But, we know, they mostly don't. The federal government could help, via some sort of triggered automatic scheme, which would give money to the states during recessions and then get paid back when the threat was over.

Now, in practice, when recessions are short and mild, all of this becomes unnecessary. In fact, the nature of state budget cycles probably winds up saving them from themselves. After all, the cuts aren't needed until the budget year following the downturn, and by the time the cuts take effect odds are that the economy is already recovering. Still, it's dangerous to the economy during a prolonged downturn, and even when there's no danger to the larger economy it still is most likely inefficient for states to embrace the boom-and-bust.

To be clear: a scheme to automatically stabilize state budgets isn't what Barack Obama has asked Congress for and therefore isn't what Klein is specifically talking about. However, in terms of lessons from the economic disaster of the last few yeas, in my view the effects of state budgeting should go very high on the list of obvious and relatively easy things to fix.

By the way, I'm still wondering whether any economist has estimated the total effects of state and local layoffs on the overall economy, including the indirect effect of still-employed teachers and others who stopped spending because of fears of future cuts.


  1. I know this is not the reference, but title made me think of the following interaction from the weird (set designed by Dr. Seuss. Really) old movie about piano lessons (!) "The 5,000 Fingers of Dr. T":

    "Is it ... atomic?"
    "Oh, it's very atomic."

    (I never get the actual title references. Evidently, some time elapsed between when my parents stopped listening to new music and when I started listening to new music.)

  2. "I'm not sure why Klein believes that the public sector at the state and local level is inherently too large; I'd think that the federal government should be, probably, relatively neutral about that."
    Because, rising young center-left star or not, he's absorbed Republican ideology on the level of assumptions - that is, fundamentally. Not sure whether it's more Jeffersonian or Reaganist Republican, but my guess would be the latter.

  3. This looks less like help to states, and more like help to teachers' unions with police and firefighters thrown in for camouflage. If Obama really wanted to help states, he'd give them block grants with few conditions attached--maybe just save jobs, we won't tell you which ones.

    Nonetheless, this is still a move that delays painful adjustments in government spending, this time state governments. It covers some of the same territory as the 2009 stimulus, and threatens to become a regular feature.

    Luckily I live in a well-run state (Massachusetts) which has reserves and raised its taxes modestly rather than gut its programs. Other states can learn the lesson or live with the consequences. That probably sounds harsh, but the federal government no longer has the money to keep bailing out this bank or these states, and it's past time for everyone to realize it.

    If the federal government does bail out states, it should be the last time, with teeth to force them to set up and fund reserves. Many states would turn down the money, I suspect.

    One final comment--I agree that the federal should be neutral about the size of state government. I don't think there's a single right size. It's much more a reflection of the values of the state's citizens.--ModeratePoli

  4. My worry is that the education funding cuts are far more permanent than implied. States like Arizona and South Carolina are spending nearly a quarter less on education now than in 2008; do you see state governments reinflating their education spending as quickly as they cut its funding once the economic picture gets better?

    In which case, these stop-gap measures being used by the federal government may need to be made into more 'permanent' spending programs. Picturing how this would look is difficult, but I could assume something like targeted teacher training programs or substantial school infrastructure development (wifi installations in every school?) could be better programs to counter education cuts than simply funding shortfalls in state budgets.

    This is probably a poorly expressed/poorly written idea, so I apologize if it sounds incoherent; I need to spend more time developing the logic here and looking out for evidence on this. I hope the underlying thought process, message, and policy implication is clear though.

  5. Now, states could budget for recessions; the flip side of this is that their revenues soar (again, automatically) when the economy booms, and they could all be responsible about putting away that money for the future. But, we know, they mostly don't.

    They don't?

    Well, the smarter states establish rainy day funds. The dumber states don't, and they also borrow up the ying yang, driving their bond ratings down. The smart states are taking advantage of their bonding power right now. Good for them. They have a rainy day fund, and they also use their stalwart bonding power to fund projects that have suddenly become value engineering positive. Last I checked, 1/3 of the states had AAA credit ratings. Good for them.

    The dumber states are stuck with massive spending and public employee union driven cost structures, and the accompanying lowered bond ratings, and non existent rainy day funds. Why should their irresponsibility be the charge of smarter states, who are more fiscally responsible?

    The irresponsible states are gonna have to face their problems. Bailing them out just postpones that day.

  6. Anon: as a Californian, part of the problem is that some of our states are irresponsible because their electorates force them to be.

    California, with prop 13 hamstringing the most stable source of state income, relies heavily on income and sales taxes, which are cyclical. It's not that we Californians tax too much or too little; it's that we do so in sync with the economy, and reinforce the boom-bust cycles.

    But try explaining that to someone when you say you want to kill Prop 13. It's a similar thing to a lot of the response on the right to the 9-9-9 plan (which is silly for many different reasons): "OMG! You're raising sales taxes!" instead of "you're lowering my income tax, too!" People hate ANY tax increase, even if packaged with a tax decrease.

    That's not to say it can't be done (the 1986 tax reform is the most prominent example). But, doing it across forms of taxes makes it that much more difficult.

  7. Sorry, but those are just excuses made for the dumb. There are dumb people everywhere, in every state, but in the dumb states, the dumbness is allowed to come to the fore.

    And fyi, similar to the federal government, Cali's problems are not revenue related. It's the spending. SPENDING. California is the poster child for massive spending increases and public employee union driven cost structures.

    And hey, I don't mind states being dumb. That's their right. That doesn't imply that the smart states should be obligated to pay for their dumbness. And bailing them out only encourages them to stay dumb.


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