Chickens, Home, Roosting

This is what happens when so called “centrists” dictate policy outcomes. You get a stimulus package far smaller than needed and poorly constructed. Now we have a jobless recovery coupled with enormous state fiscal gaps. The latter will exacerbate the former, as states make cuts in order to balance their FY 2010 budgets.

At the time of the stimulus, most folks outside of the freshwater zealots were calling for a substantially larger package. To think that a $2-3 trillion output gap could be closed with less than $800 billion simply boggles the mind. But beyond the picayune approach was the composition of the stimulus.

It was clear to anyone with even an iota of fiscal policy experience that support to states needed to comprise a much more significant portion of the stimulus. Unlike the federal government, states are constricted in their efforts to pursue countercylical fiscal policies. Not only are they constrained by requirements for a balanced budget, but many of the services provided by the state have strong countercylical demands. States are thus facing pressures from all sides- declining revenue; balanced budget requirement; increase demand for services.

An idea floated by Joseph Stiglitz (if memory serves me, in an interview with the New Yorker) would be for the federal government to backstop states. This would mean that states would receive as much financial support as necessary from the federal government, such that the states would be level funded from the prior fiscal year. Although inflation is not a significant factor, the increased demand for state services, coupled with medical inflation, would still mean some cuts would be necessary. But we’d be spared the devastating cuts many states are now facing.


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