washington, dc

The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

States Undermining Stimulus

It’s reasonably well understood that this year’s federal economic stimulus legislation helped (though not as much as it might have) cushion state and local governments from a fiscal disaster attributable to falling revenues, automatically increasing entitlement expenditures, and balanced budget requirements. The rationale for this federal aid–to keep states and localities from counteracting the stimulative effect of federal spending via tax increases and spending cuts–is less well understood. So, too, is the fact that the continuing fiscal crisis around the country continues to undermine the impact of federal stimulus.
That’s the departure point for an important new article by Harold Meyerson in The American Prospect. Aggregating the numbers, Meyerson reaches a startling but entirely justified conclusion:

[H]ow much does the government’s stimulus come to when we subtract the amount the states and localities are taking out of the economy from the amount the feds are putting in? The two-year Obama stimulus amounted to $787 billion, of which $70 billion was really just the usual taxpayers’ annual exemption from the alternative minimum tax, and $146 billion was actually appropriated for the years 2011 to 2019. That leaves $571 billion that the federal government is pumping into the economy during 2009 and 2010. Subtract the amount that state and local governments are withdrawing from the economy (they have a combined shortfall of around $365 billion, but let’s say they do enough fiscal finagling so that the total of their cutbacks and tax hikes is just $325 billion), and we’re left with $246 billion.
At $787 billion, the stimulus came to 2.6 percent of the nation’s gross domestic product for 2009 and 2010 — not big enough, but a respectable figure. At $246 billion — the net of the federal stimulus minus the state and local anti-stimulus — it comes to just 0.8 percent of GDP, a level lower than those of many of the nations that the U.S. chastised for failing to stimulate their economies sufficiently.

In other words, most of the debates we’ve heard about the size and impact of the federal stimulus effort have ignored the actual net spending once you aggregate federal, state and local government actions. That’s a pretty big ommission, and that’s why the University of Chicago’s Harold Pollack and I argued earlier this year that we need to start thinking comprehensively about intergovernmental coordination:

[F]ederal budget debates should expand to include the national budget, the sum total of spending, taxes and policies that implement and finance national governance. At a minimum, the Office of Management and Budget and the Congressional Budget Office should routinely scrutinize the financial impact of proposed federal policies on every level of government.

Meyerson goes on to examine other damaging aspects of our federal system with respect to economic policy that are well worth reading. But what’s most interesting and alarming about his analysis is that it’s so unusual. Most policy discussions in Washington either ignore state and local governments, treat them as an unimportant sideshow, or assume that the many parts of the intergovernmental system move roughly in coordination, and in the same direction. Now more than ever, it’s time to understand that the left hand of our system may be working at active cross-purposes with the right.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.