In response to the White House’s comments on the BLS’s unemployment report, Brad DeLong proposes additional aid to the states:
The biggest and easiest would be another $300 billion in aid to states for the remainder of fiscal 2010 and 2011 to keep state and local services from suffering additional cuts and to shave perhaps 1.5 percentage points off the unemployment rate.
The problem that I have with federal aid to the states at this point is that too often we’re seeing the states lay off the workers anyway so that the service cuts take place and use the money for regularly scheduled pay increases for the remaining state workers. That continues the institutionalization of the higher compensation rates for state employees, making it that much tougher for states to carry on.
Money to the states needs to have substantially more strings attached. Pay freezes, for example. Commitments not to lay off employees. Even requirements on what sorts of government employees should and should not be retained. Generally, we need fewer chiefs. Keep the teachers, teachers aides, and ordinary police officers.
Even so I’m skeptical that such a course of action will have much impact on unemployment. The proposal seems to be of the “hold on until things get better” sort. My interpretation of the BLS’s report is that we’re beginning to see the contours of the new normal more clearly and it includes a much higher unemployment rate and much lower employment rate than we’ve seen in a generation. Continuing gyrations from the federal government are only likely to aggravate that.
This whole thing reminds me a bit of federal homeland security money for states and localities. Some used this money to hire people, assuming, wrongly, it would be permanent. Others acted wisely and funded employment through their own budgets and used the federal money to buy capabilities and for training.