Socking It to the States

Socking It to the States

Sentient observers know that American state and local governments face a historic crisis–that they are cutting vital services and raising taxes, mainly on those already most stressed in diffic


Sentient observers know that American state and local governments face a historic crisis–that they are cutting vital services and raising taxes, mainly on those already most stressed in difficult times. Schools in Oregon are closing early; New York City plans to close firehouses and reduce garbage pickups. States have already closed gaps of $50 billion in their 2003 budgets. Now they face the necessity of imposing measures almost twice as drastic for 2004.

In this crisis, fiscal assistance from the federal government to the states and cities–in two words, revenue sharing–remains our most urgent economic policy need today. To see this, just compare it with all the alternatives.

Monetary policy has run out of steam. Continued low interest rates help to ward off the evil day when consumer bankruptcies and mortgage foreclosures begin to explode, but they cannot produce a recovery on their own. That will happen only after household balance sheets improve–a process of paying down consumer and excessive mortgage debts that has barely started. And so Alan Greenspan has faded into the wallpaper; he emerges nowadays only to make timidly optimistic forecasts. There is nothing much more he can do.

Tax law under George W. Bush is a disgrace. How else to describe a proposal whose centerpiece is the elimination of income taxes on corporate dividends? How else to describe Bush’s fixation on permanent repeal of the estate tax? These measures and the others like them are not a growth policy. They will have little effect on spending, for two well-known reasons: They are targeted to the wealthy, and they are back-loaded so as to conceal their true long-term impact on budget deficits.

A better policy would be to cut working people’s taxes temporarily. A partial holiday in the Social Security payroll tax has been proposed, and it’s not a bad idea. But are tax cuts what working Americans really want? Would they rather have them than art and music and physical education and foreign languages in their schools? Would they rather have them than open libraries and decent garbage collection? There is just no evidence that they would.

What about tax cuts for business? A business investment tax break, such as temporary accelerated depreciation, would not do much good, but it probably wouldn’t do great harm. However, with so much excess capacity, don’t count on a big boost from this area, whatever happens.

New federal spending, on the other hand, would effectively promote early recovery. And we will see this at work later this year, when by a miracle of astute timing the Pentagon sets about replenishing its Tomahawks and tank treads. This will boost economic growth, but it will not create many new jobs and will do almost nothing for the well-being of most Americans.

Representative Richard Gephardt has proposed repealing the 2001 Bush tax cuts and using the revenue for a wide expansion of health insurance. It’s a good idea. Just as the tax cuts didn’t help the economy much, repealing them would not hurt much. And using the money to meet a clear social need would be a good thing. But would it create many jobs? That is neither the point of Gephardt’s proposal nor would it be the effect.

And as for the budget, mercifully Democrats are beginning to forget the demented moment in the late 1990s when some thought that endless surpluses were by themselves the ticket to full employment. The architects of that idea are hiding safely at Harvard and Citigroup. But the idea that anyone should care about current budget deficits must still be resisted. To recover economic growth in the next few years, we will need all the deficit spending we can get. The more now, the less later, when recovery finally starts up.

States and localities are cutting their budgets right now. The cumulative effect, next fiscal year, will be nearly 1 percent of total GDP. Those are direct cuts in spending or direct tax increases on those who spend almost everything they earn. That is quite enough to bring on another bad year for the economy as a whole–while business investment sputters and consumers continue to slow down. In the following year things could be even worse.

Put another way, the deficits of state and local governments can’t be kept on the books, so they have to be transferred. To whom? The worst, and most likely choice, is to cut teachers and sanitation workers and parks and libraries and courts and prisons. The second worst is to raise taxes, mainly on the poor through sales taxes and on middle-class homeowners. There is no third worst choice for states and localities alone.

Why not stop this downward spiral here and now?

Unlike the states, the federal government can borrow as much as it needs. There are times when it should do so. Now is such a time. To borrow about $100 billion a year at low interest rates in order to stop state and local budget cuts over the next three years would not harm the United States. On the contrary, it would get us through the hard times, saving public services Americans need and care about, and it would get us into position for a real economic recovery later on. It’s the smart thing to do. It’s the right thing to do. And it would be a popular thing to do.

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