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Lou Cannon: Feds Pull the Rug Out from Under States
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.
Comments
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» on 07.25.10 @ 09:55 PM
Lou, I always enjoy your articles. They are balanced and well thought out. Bravo on another excellent commentary.
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» on 07.26.10 @ 08:59 AM
I am a first time reader and am a Pennsylvania State Employee. As such I have a correction to your statement on our layoff situation. We are facing the 700 - 1000 layoffs now, if the $850M doesn’t come through the number will jump to close to 20,000 state, municipal, and school employees.
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» on 07.26.10 @ 09:04 AM
If the feds didn’t have the money in the first place, they wouldn’t be able to ‘pull the rug out’. Just another argument against an overly large centralized government.
Anyone notice that the Brits are considering dismantling the entire centralized management apparatus behind their government-run health care and ‘delegatin’ health care decisions to (gasp!) doctors? What a concept!
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» on 07.26.10 @ 09:46 AM
The most rabid Keynsian in practice was Ronald Reagan… see the deficit curve at:
We used to say that Democrats started wars and Republicans ran up high public debt, well, since Ike and Nixon/Ford.
Now Republicans start wars (2X Iraq, Afghanistan, Grenada, Panama…) and Obama a Democrat is running up the debt.
At least Krugman looks at the data. The worst dysfunction comes from legislators and officials who ignore it…
listen to
http://www.thisamericanlife.org/radio-archives/episode/410/social-contract
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» on 07.27.10 @ 09:05 AM
Let’s cut back all federal fiscal support of states and begin with those that take a lot more than they give. Not surprising, that would be the Red States. Its a well known fact that the fiercely independent, government hating, go our own way Republican-dominated states are almost always the ones being subsidized by the progressive Blue States. Republicans sure hate taxes and paying their own way but are very quick to cash their government checks. (Still haven’t met a Tea Bagger sending back their Social Security checks and refusing Medicare. Odd, isn’t it?)
Here is what the 2005 data from The Tax Foundation and Atlas of US Presidential Elections shows: “The red states (those that vote Republican) generally receive more subsidies from the federal government than they pay in taxes; in other words they are further to the right in the graph (click link to view). It is the other way around with the blue states (those that vote Democratic).
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2010/03/31/red-states-blue-states-and-the-distribution-of-federal-spending/
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» on 07.27.10 @ 09:30 AM
Another wormhole opened up and brought empty from a alternate universe. I Now realize that empty just hates. That’s all. Just hates. In his universe California, New York, and Illinois are ruled by evil conservatives. Jesus man I could write your comments. You are a broken record.
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» on 07.27.10 @ 10:08 AM
“Republicans aren’t trying to rescue George W. Bush’s reputation for sentimental reasons; they’re trying to clear the way for a return to Bush policies. And this carries a message for anyone hoping that the next time Republicans are in power, they’ll behave differently. If you believe that they’ve learned something — say, about fiscal prudence or the importance of effective regulation — you’re kidding yourself. You might as well face it: they’re addicted to Bush.” Ouch, that smarts Mr. Krugman.
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» on 07.27.10 @ 02:45 PM
Naw, no hate from emptynewsroom. A really interesting graph instead.
It is quite a perceptual gap… we somehow all think wealth comes from mining, farming, lifting oil, fabricating, etc. Oddly enough the metropolitan centers that are fed by those activities end up multiplying that wealth by large factors. And so Venice, London, New York, Shanghai…. etc. But we all fell kinda unhappy about it, because moving money around doesn’t feel productive.
A Red-stater might argue that the wealth really starts from them and that they are exploited by the metropolitan centers… NY, Chicago, LA. It might be even be true. We have that even in CA… the Central Valley is one of the most productive ag regions in the world, but we associated `wealth’ with LA and SF.
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» on 07.27.10 @ 03:17 PM
Jeeze Empty we all ready know you have to hate republicans, so quit the repetition.
The point is you cannot pay down debt by moving a diminishing amount of wealth around. Redistribution, taxes and all other such socialist and Keynesian type economic policies do nothing to create more wealth (national, not personal you idiots) and do much to hamper wealth creation by taking profit incentive away. This is not a partisan rant; I don’t believe that gambling in the stock market builds wealth either. Investment wealth at the personal level is nothing more than redistribution.
Think about it people. You have two parties arguing over their version of wealth redistribution and neither is doing anything about wealth creation. No instead we as a country have done much to destroy our ability to create wealth and the two party system of socialists and oligarchs argue over how to divide the shrinking spoils.
I am an industrialist. I believe by extracting our own resources, utilizing our own brain and brawn, manufacturing and growing our own goods, we will become prosperous. Leaving it to others to do while becoming a service economy equals servitude. You all can snipe and fight over the diminishing scraps, obfuscating the problem with a plethora of policies and politics, but until you are ready to earn what you spend be prepared to go broke and starve.
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» on 07.27.10 @ 03:26 PM
P you and the Keynesians still confuse personal wealth with real wealth, tangible wealth with imaginary wealth. Metro areas that inflate the real value of things by speculation and gambling got taught a very hard lesson about putting your faith in vapor rather than tangible assets when the housing bubble burst. Farming, manufacturing and energy production are real wealth. They are tangible. It doesn’t matter if the hard labor of the farmer is not rewarded equitably with the useless labor of the city dwelling trial lawyer. The farmer’s goods add real value to the economy while the city dweller service worker is a net drain. Get a clue. You gave a great example of the nasty side of wealth redistribution.
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» on 07.27.10 @ 03:39 PM
Every nation discovers the following truisms, sooner or later: A prosperous middle class earning livable wages, with the benefits of access to health care, safety in the workplace, maternity leave, protection from dishonest corporations, good public education, affordable higher education, and elected representation putting into effect public policies favorable to the many, all put together will stoke the engines of the economy harder and more reliably than any other single thing. Progressive have fought to ensure these are the conditions enjoyed by as many of our fellow citizens as possible. Conservatives generally try to thwart these efforts and pull the country in the opposite direction. I can’t make my case any more clear than that.
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» on 07.27.10 @ 03:41 PM
Let’s get past the high level of economic ignorance that is currently on display by you obama supporters and go to the core of how real wealth is created. Not the make believe world of toxic assets created by political control freaks, and corporate criminals - from both parties.
Leonard Read said it best in his story titled, “I, Pencil: My Family Tree as told to Leonard E. Read,”
I quote, “The pencil narrates the story of how it came to be. It started out as a tree—a cedar of straight grain that grows in Northern California and Oregon. The pencil goes on to describe the countless people and processes involved in its production—from cutting and transporting logs to supplying electrical power to mining graphite and extracting the rapeseed oil from the Dutch East Indies that is used in the process of making erasers.
Millions of human beings have a hand in my creation, no one of whom even knows more than a very few of the others. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.
There is a fact still more astounding - the absence of a mastermind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is how wealth is produced in society.”
Perfectly said. And Dan I know you love to tweak the poor nose of empty and its ilk but you are dealing with an actual child. Leave him be, it does enough damage with its narcissistic personality disorder.
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» on 07.27.10 @ 04:44 PM
You don’t think countries with a more intelligent blend of capitalism and socialism have “free market forces” at work in their economies? Of the world’s ten largest economies, almost all have a far greater degree of public policies favorable (i.e.: socialistic) to the general population than the U.S. - German, UK, France, Italy, Canada, etc. Your childish fable perfectly illustrates the simplistic level that so many “hand of the market” conservatives operate on. Unfortunately, the global economy and sound governance are a lot more complicated (and interesting) than the Little Golden Book versions Glenn Beck tells on his story time for tots program on Fox News.
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» on 07.27.10 @ 09:40 PM
Well, there is no doubt that Ronald Reagan deficit-spent the US back into productivity. But it may be that the US voting public trusts only Republicans to deficit spend.
A farmer or a miner still needs financing and marketing… if no one buys your product, you go bankrupt. So advertising and marketing are crucial to building national wealth… additionally, a legal system is necessary give investors and farmers/miners confidence that they can get some of the fruit of their labors.
Ideally, in the US economy, we’d pay down the deficit during prosperous times…. hey, the Clinton/Republican Congress of the 1990’s did that. So did just every administration between WWII and Carter, then Reagan deficit-spent us out of the 1970’s recession.
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» on 08.03.10 @ 06:35 AM
http://www.nytimes.com/2010/08/01/opinion/01stockman.html
Nice article by David Stockman, Reagan’s OMB director.
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