Obama’s disappearing stimulus

May 29, 2009

bills– Christopher Swann is a Reuters columnist. The views expressed are his own –

It’s not just California that threatens to sabotage the Obama stimulus. State and local governments across the nation are gradually unravelling federal efforts to revive growth.

The states have been inveterate stimulus eaters in the past. For most of the 1930s the expansionary policies of the federal government were just sufficient to offset the shrinking of state and local governments. Click here for PDF.

States also raised taxes in the recession of the early 1990s and in 2001. It was a problem that Obama — his team stocked up with renowned  scholars of the Great Depression — was determined to avoid.

Sadly, the financial woes of the states and cities — many of them self inflicted — are overwhelming these good intentions. The maths now looks distinctly unpromising.

The Obama administration has pledged around $140 billion in fiscal assistance to the states with the express goal of saving them from tax increases, layoffs and painful cuts in services. But as state tax revenues have tanked, they now appear to be heading for a $370 billion shortfall over the next few years. Federal largesse will cover just 40 percent of the gap.

Nor is the roughly $200 billion fiscal drag from the states Obama’s only problem. America’s towns present a fiscal headwind as well, with an expected funding gap of  nearly $100 billion, according to the National League of Cities. Taken together these could cancel out up to 40 percent of the federal stimulus.

Balanced budget rules put the states in the same position as crisis-ridden emerging markets — a pro-cyclical fiscal policy is their only option. Yet they do have the ability to minimize the damage to consumption.

It is an opportunity many states do not appear to be taking. Indeed some are going about their economizing in ways that would make a good Keynesian blanch. The lesser of evils in the current circumstances would be to focus revenue-raising on those unlikely to cut back spending — the rich.

Instead, all too many of the measures so far have been regressive, putting most of the burden on people who have little option but to tighten their belts. Earlier this month Massachusetts lawmakers voted to increase sales tax by 25 percent with a view to raising $900 million a year. Six other states are considering following suit.

So far 36 states have cut spending — mostly on education, health and programs for the poor. Arizona is cutting cash grants to 38,500 low-income families, while Rhode Island is slashing funds for affordable housing.

Again, these are exactly the kind of payments a Keynesian would normally recommend increasing in a recession — since low-income groups have a low savings rate and hence a high multiplier. At least 39 states have made cuts in state workforce.

More radical still, some towns are simply shutting-up shop and “disincorporating,” according to the Wall Street Journal.

Rio Vista and Vallejo could soon be the first Californian towns to do so since 1972.

There are plenty of improvements that could be made to state finances. Lawmakers could economize on expensive mandatory criminal sentencing rules and trim generous pensions. Ditching the supermajority requirement for tax increases would allow them to build up larger rainy day funds in the future. But none of this would help now.

The hard fiscal logic offers few ways out. Going back to Congress for more money is not politically viable. Aid to the states was a hard-sell last time and had to be watered down.

Damage limitation is now the only option. At the very least states should seek to balance their budgets in such a way that minimizes the drain on personal consumption.

This may mean following the lead of Delaware, where the governor has proposed increasing the top income tax rate by a percentage point to 6.95 percent. Minnesota lawmakers are also attracted to this idea.

Extracting more from the wealthy won’t fully plug the gap. But as the centrepiece of state revenue-raising, it may be the least economically harmful choice.

13 comments

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Most of the countries local and state governments will go into default. California and Illinois’ legislatures can agree on nothing regarding revenue increases and spending cuts. I suspect similar political failures will crop up in other states and municipalities.

It is ludicrous to think removing people from welfare and cut low income subsidies can help while we loose a half million jobs or better every month. There is no moral or economic rational for such a move other than to keep money for other less important programs and and service debt load in the face of declining revenues.

I would not starve my family to keep my credit rating. Why then do governments put finances above all else? Surely they don’t think they are going to keep their comfortable elected positions much longer. Or will they.

Posted by Anubis | Report as abusive

I’m not surprised. A similar situation would occur on a personal level. Money would not go directly to spending. Given high debt loads, I believe that a fair amount of money would go towards repayment. The GDP is such a distorted caricature of reality to me because it conceals many of the dynamics in the background – like the repayment of debt, shrinking profit margins and impairment of value.

As a retailer what his inventory is worth. Ask a consumer what the inventory plus shares in a company close to bankruptcy are worth if he is out of a job and heavily in debt. If the government gives such a person cash, would he necessarily use it to spend on merchandise? The company got messed up due to an underlying fault in the business model.

We have all been approaching this recession as a bad thing rather than something that should normally occur to instigate positive changes. So we keep feeding it, helping it drag and preventing the inevitable. This is not to say that I don’t consider the problems serious. Which is precisely why the last thing we want to do is pay to maintain the problems.

However, my understanding is that the recession is over and behind us. Unless of course Reuters is full of bloggers that intentionally feed the public with faulty information. The recession is over and we are on the road to a recovery. We just want to prevent the problem from repeating itself. So really these types of articles about stimulus spending not working seem counter-productive. The stimulus is working. The bloggers say so. So the party continues.

Posted by Don | Report as abusive

When the government paid out stimulus checks to the people, for the most part, we paid down our debt and put money in savings.

This is exactly what should have happened. It would have allowed banks to wipe a good deal of consumer debt off the books and the increase in saving would have given them capitol.

But even though we are “the backbone of the economy” the government in its infinite wisdom decided to give the money to banks directly. Now executives that don’t need the money have plenty more. And you and I still have debt on bank books while our taxes pay to line corporate and bank executive pockets.

Yet, Obama and many Democrats will push for a national health care plan even though our Social Security and Medicare plans are at risk for going bankrupt? Can we really afford another poorly managed government plan?
I really thought Obama would concentrait on getting the country back on its feet. But instad he seems determined to make a name for himself by creating this healthcare program no matter what. Because he feels we need it.
My answer to that President is that we need a lot of things but so far we have been unable to pay for them.
Our roads and bridges have been ignored and our educational system has crumbling schools and old material to teach with. Tax payers incomes are going down not up and do not keep up with inflation. Yet our state, local and federal governments will ask us for more? I do not agree that this will help American’s.

Posted by John S | Report as abusive

I understand that the money was given mostly to the banks, to eliminate the inflationary pressures of repairing personal finances.
had the bailout money gone directly to debt reduction, the banks would no longer have bad debts eating them, however they would also lose the profitability of securitization of bad debt.

Posted by steve | Report as abusive

“At the very least states should seek to balance their budgets in such a way that minimizes the drain on personal consumption”? WTF?

It seems that a strong combination of insanity and stupidity has taken over the economic and geopolitical spheres. I love this “solution” to this crisis. “Lets solve a borrowing and spending crisis by borrowing and spending more”! WHAT A JOKE!

Our entire problem is consumption. Instead of saving and producing we spend and consume. Everyone and their mother was taught not to be profligate. Yet every year our national debt balloons and we put off the problem for another year, so that another generation of Americans can handle it. The ultimate Adjustable Rate Mortgage is owned by the US government. Stop spending, start saving people. No pain, no gain. Stop looking to steal from someone else whether it’s the rich, minorities, the middle-class or anyone else. Taxing everyone to death is hardly a solution to this problem.

We tried the easy way for the past twenty years look at where it got us. Stand up, tough it out, take the misery brought upon us for a few years, or try the “easy fix” and see where it leads again. YOU CANNOT SPEND YOUR WAY INTO PROSPERITY OR BORROW YOUR WAY OUT OF DEBT. PERIOD.

Posted by Nick | Report as abusive

We are not, I believe, on the road to recovery. You can’t build wealth on borrowed money. Borrowed money is what got us into this mess. When people own the car they drive, and own the house and the furnishings in their houses then we can begin to see actual wealth come about. Pension funds must begin to do their own investing in buildings they own, with little or no leverage. The yields may not be as high as the fake yields of yesterday, but there will be bricks and mortar to back up the dollars spent. It will take some time, but we need to put this country back on a solid fiscal footing.

Posted by f belz | Report as abusive

“I understand that the money was given mostly to the banks, to eliminate the inflationary pressures of repairing personal finances.
had the bailout money gone directly to debt reduction, the banks would no longer have bad debts eating them, however they would also lose the profitability of securitization of bad debt.”

Does that mean that banks didn’t want to loose profit that would be made if debt is repaid? I just want to make sure I understand.

And if that is the case it would seem that the banking industry decided to push for its profit at the expense of American families.

And does that mean that they basically asked for and got American tax payer money, so that they could stay in business long enough to collect payment owed to them by the very taxpayers whos money was used to keep them alive?

The stimulus idea was tried by Japan when Japan went into recession, it didn’t work. So why did George Bush and then Obama try the same thing? Because nobody listens to history or even bother to find out if the stimulus idea had been tried before. Besides according to Judical Watch his bail out of AIG, Fanny Mae and Freddie Mac was all old fashioned political pay back for campaign contributions $100,000 from AIG and millions from the other two. The Federal Reserve is a private bank that has never been subjected to an audit and can and does print money to pay any of its friends. Inflation is going to skyrocket. America is being subjected to financial slavery, banksters and politicians are stealing all the money.

Posted by Paul Bartron | Report as abusive

To any who might have any interest in this, these are closing arguments from a discussion I was having on another issue which I think speaks to this one:

In the declaration of independence of 1776 it is written,

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. –That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed”,

http://www.law.indiana.edu/uslawdocs/dec laration.html

Life, liberty, and pursuit of happiness. If you look around you in this country today, you can see that the promise of this declaration has yet to be fulfilled for every American. Many Americans don’t have much in the way of a life. Many don’t have much in the way of liberty. And many more yet, are so oppressed by the conditions in this country that their only “happiness” lies at the bottom of a bottle, or the end of a needle.

A close examination of the problem shows a common thread. And that thread is money. But not just money itself. The problem comes from the profit motive, which changes money from a medium of exchange to a medium of control.

Just look around you. Read the headlines on this site. You’ll see right away that I write truthfully. Whether the problem is attributed to CDS, credit liquidity, poor regulation, etc….
The problem revolves around money, and quarterly profit reports.

I advocate for the automation of the treasury and federal reserve. The reason is simple. The people who run those bodies come either from wall street or Washington. As a result, they will implement policy that protects their own interests first. The sole job of the treasury/federal reserve is to maintain a consistent supply of money, and to maintain the value of that money. This resource (money) must be kept in limited supply. That’s why simply printing more causes inflation. The accumulation of this limited resource for its own sake is called profit. And when money is constantly drawn from the system to the tune of billions every day, then eventually a deficiency develops.

And if you look around you today, the deficiency is tremendous. And our government has decided to add to the debt in order to “fix” the economy. Now all of this is well understood by many and to a much greater depth I’m sure, than I understand.

But what puzzles me has been the idea that this should some how mean that human beings should suffer because of this. Our money has no real value whatsoever. It’s not even attached to the gold standard. The value of our currency is based on the “good faith and credit of the United States Government”. I can’t speak for anyone else, but I have little if any faith left in our government. And our credit is terrible.

But considering that our money is worthless, why not simply divide GDP across the board equally to all adult citizens?

Most of the time the reaction is one of knee-jerk fear or disgust. But if one looks at the free open software movement, one can see that great productivity and innovation flourishes in an environment where access to the building blocks of production are accessible to everyone. Linux started up in the 90’s, well after Microsoft and Apple had become established. And in recent years (the past ten or so), Linux and open source software have become major players in the marketplace despite Microsoft’s efforts to keep them out. Open source and Linux don’t depend on the profit motive, so lack of money is only a side inconvenience because programmers have to have other jobs in order to pay their bills.

Code is not locked down as intellectual property to which no one else has a right. Instead code is shared and given away. This allows young would be programmers to get their hands on real code and create applications that are useful and help them develop their skills free of legal or financial encumbrance.

Open source software is important because it demonstrates that allowing the building blocks of production to be available to all without restrictions, encourages innovation and forward thinking.

In our economy the building block of production is the medium of exchange. If you are unable to exchange resources, you can’t provide for your needs, let alone your wants. In our society money is printed by the government. Our declaration of independence grants us the rights of life, liberty, and pursuit of happiness. Money is needed in this society in order for any of those things to happen. And since our currency is not attached to a gold standard but is simply printed on government presses and set with an arbitrary value, then that makes the dollar public property. The government is a public body. The money it creates is public property.

Divide GDP amongst the citizens. And this way the gifts and talents of all Americans are given the means to flourish. As of yet I have had no logical arguments that speak to any flaws that can be examined. I have gotten arguments saying that people must work for money. But the idea I bring to the table is a complete departure from this philosophy. Any attempt to understand this idea from the work=money perspective will be impossible.

Yet the very idea I bring forward is applied in our capitalist structure already. It’s called investing. “It takes money to make money”. And so even though the idea I present has been called socialist, it is actually much more individualist and capitalist. It is simply capitalism of a much higher order. Money can’t cure AIDS. But it CAN pay to educate the young mind that will. Money can’t solve the energy crisis. But it CAN finance innovators that have the technological solutions.

Dividing GDP equally actually gives every American a truly equal opportunity to live the American dream of life liberty and pursuit of happiness.

The question should not be one of “should we do this?”, but rather “How do we do this?”

Thanks for reading.

Benny.

Rather then respond to your sprawling post, I will just ask you a simple question:

Have you ever read a basic economics textbook?

Posted by Anon. | Report as abusive

Mr. Bartron, Einstien stated the definition of insanity was to continue to apply the same action and expect a different result.

Posted by Anubis | Report as abusive

On the other hand, the difference between insanity and genius is measured by degrees of success.

Posted by Anon | Report as abusive