When he was faced with conflicting fiscal assessments, Ronald Reagan often quipped that if all the economists were laid end to end they wouldn’t reach a conclusion. Nor was he the first president to question such equivocation. Harry Truman supposedly asked aides to provide him with a one-armed economist “because economists are always saying on the one hand, on the other.”
The Truman story is likely apocryphal, but it reflected a frustration of the time of chief executives — namely that economists tended to hedge their bets. No longer. Today, economists are offering President Barack Obama tons of unambiguous advice that, unfortunately, runs in opposite directions.
Rabid Keynesians such as economist Paul Krugman, a New York Times columnist, propose a new massive federal stimulus bill to spur the nation’s anemic recovery. These big spenders, outgoing White House budget director Peter Orszag among them, seem undeterred either by political reality or the lackluster results of the American Recovery and Reinvestment Act of 2009, the largest peacetime stimulus bill in history. When ARRA passed in February 2009, it carried a price tag of $787 billion that has since been revised upward to $862 billion. But its results have been mixed, and unemployment is still pushing 10 percent instead of the 8 percent that Obama’s economic team predicted.
Arrayed against the Keynesians are deficit hawks who worry that the United States will go the way of Greece unless there is immediate action to reduce soaring public debt. The hawks are also stronger on ideology than evidence; they don’t (or can’t) explain how a deeply wounded economy is going to provide the revenues needed for debt reduction. But they know what they believe. Erskine Bowles, a former White House chief of staff for President Bill Clinton and now co-chairman of Obama’s national debt commission, ominously told the nation’s governors earlier this month: “This debt is like a cancer. It is truly going to destroy the country from within.”
The competing doomsday scenarios have confused the public and all but paralyzed Congress, which has neither reduced the deficit nor provided additional stimulus. The losers are the nearly 15 million Americans who are officially unemployed and the millions of others who are underemployed or have given up looking for work. The losers also include many states and municipalities, which are struggling to balance budgets with reduced revenues as health-care costs rise and pension obligations mount.
No state has defaulted on its debt since Arkansas did so in 1933, but state debt is not a trivial issue. “Greece scared everyone,” said David Wyss, chief economist for Standard & Poor’s. According to an analysis by JPMorgan Chase, investors rank the probability of default in California, Illinois, Michigan and New York as roughly equivalent to that of default by peripheral European economies such as Portugal and Ireland.
More imperative than future debt for most states is the urgent need to pay their bills out of revenues that remain below pre-recession levels. Except for Vermont, states are legally required to balance their budgets, and they have done so with spending cuts, borrowing, tax increases, and some modest tinkering with pensions. ARRA, despite its shortcomings, has helped states perform this difficult balancing act by increasing the federal share of Medicaid, the program that provides health care for the poor. Keeping this more generous formula in place through the 2011 fiscal year ending next June 30 has become the No. 1 priority of the states in their struggle to gain budgetary running room from Congress.
Twenty-eight states assumed the formula would continue when they drew up their 2011 budgets even though ARRA provides the additional money — estimated at $24 billion — only through the end of the 2010 calendar year. The states had reason to believe the money would be forthcoming. At one time or another bills extending the more generous formula passed both houses of Congress as part of an add-on stimulus package. Then Senate Republicans became agitated over the debt issue, and the Democrats blinked. Obama appointed a deficit reduction commission and Democratic congressional leaders began a step-by-step dismantling of a package that also included an extension of unemployment insurance and continuation of various tax credits.
“What once seemed a certainty became problematical,” said Michael Bird, a Washington lobbyist for the National Conference of State Legislatures.
The Senate, on its fourth try, finally voted to extend unemployment insurance in a stand-alone measure. Because of the jobs crisis this extension had political sex appeal; even the Republicans who voted against it claimed they favored it but wanted to pay for it out of existing stimulus funds. In contrast, the proposal to maintain extra federal Medicaid aid for the states — known by the mind-numbing title of Federal Medical Assistance Percentages, or FMAP — is relatively obscure to the public even though it would save jobs and in so doing increase consumer purchasing power.
States and cities have laid off 400,000 workers during the Great Recession, with teachers bearing the heaviest brunt. Unless the Medicaid formula is extended, that number will soar in 2011. In Pennsylvania alone, Gov. Ed Rendell anticipates an $850 million shortfall and 1,000 more layoffs. Rendell, like many governors, has signed a budget that has largely been balanced by spending cuts and the prospect of an FMAP extension.
In addition to the layoffs, states are cutting back on medical services: Virginia will no longer pay for eyeglasses for the poor, Florida reduced reimbursements to nursing homes, Idaho stopped paying Medicaid providers. When it comes to budget balancing, says Scott Pattison, executive director of the National Association of Budget Officers, “All of the low-hanging fruit is gone — most states are cutting into bone.”
Even economists who make debt reduction their top priority find merit in easing the burden on the states from Medicaid, which has grown by leaps and bounds since the onset of the recession.
“I’m not in favor of cutting the states off cold turkey,” Wyss said. Expressing the kind of balanced view that once made Truman so wary of economists, he added: “We need a little more stimulus right now and a lot of debt reduction soon after. In the long run, you have to pay back the money you’ve borrowed.”
Politicians, however, are focused on the next election, not the long-term economic health of the nation. As such, they are muddying the waters of rational debate, with congressional Democrats promising that they will get to debt reduction in the sweet bye and bye, and congressional Republicans thundering about presidential overreach while failing to make hard choices of their own. The occasional exceptions only underscore the prevailing lack of realism. When, for instance, House Minority Leader John Boehner, R-Ohio, suggested that the Social Security retirement age might have been to be raised to 70, Senate Republicans ignored him and changed the subject.
Obama has feet planted firmly in both economic camps, touting stimulus and debt reduction on different days in statements that madden his liberal base without persuading the opposition. Republicans are confident they can capitalize on growing dissatisfaction with Obama and his policies in the coming midterm elections, possibly recapturing the House of Representatives and making gains in the Senate and state houses. But what happens then? The elections, whatever the outcome, won’t put the jobless back to work or resolve the debt crisis.
In the meantime, says budget expert Corina Eckl of NCSL, states are “between a rock and a hard place” in trying to determine if they will have additional federal funds for Medicaid through the end of the fiscal year. If a measure to accomplish this isn’t passed by Aug. 1, the issue probably won’t be resolved until a presumed special session of Congress after the November election. Most states that have been counting on these funds will have to make budgetary decisions before then.
Small wonder that when the Massachusetts Legislature sent Gov. Deval Patrick two budgets, one with the additional federal Medicaid money and one without it, he unhesitatingly signed the latter even though he knows it will require painful budget cuts. Patrick is a friend and early supporter of Obama, but he understands that when it comes to dealing with the federal government, states had better be prepared to fend for themselves.
— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.