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Lou Cannon: Saving the States Is the Best Stimulus

Congress can best help the economy by funneling money to the states to create jobs and boost infrastructure spending

As the jaws of recession tighten upon the land, Congress has an opportunity to rescue the states even before President-elect Barack Obama takes the oath of office.

Lou Cannon
Lou Cannon

Congress will — or should — have a sense of urgency in the current special session. The economy is in true peril, with joblessness on the rise. Credit remains tight, and consumer sales are slumping. The federal government is lending additional billions to the troubled insurance giant, AIG. Some two dozen states face budget shortfalls, as tax receipts decline. Many states have pared services, often at the expense of children. The New York legislature is considering rolling back an expansion of children’s health insurance approved earlier this year. California, which a few weeks ago approved a budget balanced mostly by gimmicks, could run out of cash early in 2009.

If all goes well in the special session, Congress will approve a massive stimulus package that President Bush could sign into law as early as Christmas. All may not go well. While there is general agreement on the need for additional stimulus, there is no consensus on what the package should contain beyond extension of unemployment insurance. Some members of Congress — and some members of Bush’s economic team — favor sending checks directly to individuals, as the administration did earlier this year with mixed results. While this is theoretically an efficient stimulus, the impact is undermined if people are so worried about the near future that they sock the money away instead of spending it. With savings in individual retirement accounts plummeting, some economists believe that recipients who can afford to do so will do just that.

An alternative or additional stimulus is funneling a large part of the stimulus, perhaps as much as $100 billion, to the states where the money could provide jobs and build neglected infrastructure. The case for the states was made with particular urgency late last month by Govs. John Corzine of New Jersey and David Paterson of New York in testimony before a House committee.

“States need direct and immediate fiscal relief,” Paterson said. “Washington needs to step up and help states address a problem that was not of their own making.” This is an overstatement. While the housing and financial services industries deserve special responsibility for our current economic mess, neither governments nor individuals are blameless. Several state governments, with California in the lead, ignored incessant warnings and declined to fill their “rainy day” coffers in the boom that followed the dot-com recession. And millions of homebuyers were as eager to take advantage of enticing and unrealistically low home loans as the banks and mortgage companies were to offer them. By any measure, there is blame enough to go around.

Scapegoating aside, however, there are sound reasons why the next federal stimulus should give preference to the states ahead of individuals or favored industries. Traditionally, the objection to subsidizing states is that the money takes so long to work its way into the economy that mild recessions often end before the infusion has a substantial effect. This doesn’t feel like a mild recession. Douglas W. Elmendorf of the Brookings Institution, a former economist with the Federal Reserve and the Clinton White House, wrote a paper in January opposing infrastructure spending because it was not fast-acting enough. Now, seeing a “prolonged downturn,” Elmendorf has endorsed infrastructure spending. His views are echoed by the influential magazine, The Economist, which once anticipated a short and shallow recession but now foresees a downturn that will be long and severe.

Funneling money to the states can be an efficient way of creating jobs and boosting infrastructure spending. “Jobs are the key,” said Bill Hauck, president of the California Business Roundtable. The U.S. economy has shed 1.2 million jobs this year, with the numbers certain to go far higher.

The Economic Policy Institute, a liberal group, estimates that $75 billion in infrastructure spending will create a million jobs. That may be optimistic, but there is no question that infrastructure spending is a good economic value in a down economy. One estimate is that every dollar spent on infrastructure increases the gross domestic product by $1.60. The pace of this spending can also be accelerated if government officials concentrate on projects that have already been approved. Some 16,000 public schools, under control of states, municipalities or school districts, have deferred maintenance needs with a price tag in the scores of billions. Many state transportation projects have also been approved and are waiting for funding. In California alone there are nearly $1 billion of pending transportation projects that officials say could be begun within 60 days.

There are, of course, downsides to massive government spending for even the best of purposes. At the same congressional hearing where Paterson pleaded for action, South Carolina Gov. Mark Sanford opposed burdening the struggling U.S. economy with billions of dollars of additional debt. “Simply throwing money into the marketplace in the hope that something will happen ignores that fact that the government has already put $2 trillion into the system this year,” Sanford said.

As a longstanding deficit hawk, this columnist is sympathetic to Sanford’s argument. For decades, the United States has been living on a credit card financed by China and other Asian countries. At some point the bill will come due, and our children and grandchildren will have to pay it.

But desperate times call for desperate measures, as the Bush administration has belatedly recognized since the economy imploded in mid-September. It makes little sense to talk of “socialism” or stint on the states when the government is nationalizing banks, bailing out the insurance (and soon) the automotive industries, and investing the full faith and credit of the taxpayers in the preservation of market capitalism. Jobs and savings must also be preserved, as experimental-minded President Franklin D. Roosevelt realized in 1933, and as many expect President Obama to recognize in 2009.

FDR and his successors were guided by the insights of the great British economist John Maynard Keynes, who demonstrated that government action was needed to restore a malfunctioning market economy. As celebrated free-market economist Milton Friedman, the architect of the Reagan Revolution, put it in a much less severe downturn, “We are all Keynesians now.”

Keynes, a serious man who did not take himself too seriously, was once asked whether investment decisions should be based on long-term or short-term factors. “In the long run, we’ll all be dead,” he quipped. In the short run, it is wiser to take counsel of our hopes, rather than our fears, as FDR did. Congress not only has an opportunity to save the states and provide jobs for millions of Americans at this special session. It has an obligation to do so.

— 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.

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