Investment blogger The Mad Hedge Fund Trader calls for a “Marshall Plan” to rescue state governments from the consequences of their own folly:
States are shoveling money out of the economy nearly as fast as Obama is shoveling it in.
During the bubble, the states thought incomes were higher than they really were, were richer than they really were, and bulked up on services as if the party would go on forever.
As a result, services grew faster than the economy for many years, especially when it came to building new prisons. Because of the ephemeral nature of property and stock gains, that movie now has to run in reverse, and state services have to shrink down to what they can afford. During the last two recessions, state and local governments hired, easing some of the pain at the local level. Not this time. Teachers, policemen, and firemen have been laid off with reckless abandon, the oldest and most expensive usually targeted to go first. Obama is going to have to come up with some sort of “Marshall Plan” for the states to enable them to transition out of their structural deficits towards fiscal soundness.
I can see lots of enthusiasm for the “rescue” component of such a plan. After all nearly everybody likes spending money. I don’t see nearly as much, maybe none at all, for the remedial part of it, insisting that states right their fiscal ships.
There is severe risk of moral hazard if the federal government continues to shovel money at the states without strings attached and attaching strings will inevitably anger the very voters that the Democratic Party depends on for electoral victories. Along with African Americans state, federal, and local government workers are the most dependable of Democratic voters.
Can anyone think of a precedent for such an act by the federal government? The closest I can come is sending National Guardsmen to enforce school desegregation back in 1957. Can you imagine the federal government calling out the National Guard to force the state legislatures to pare back their current and retired employee benefits? Me, either.
Update
Here’s more in a similar vein from Christopher Edley Jr., in an op-ed in the New York Times:
That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.
Here’s how this would work. States already receive regular federal matching grants to help pay for Medicaid, welfare, highway construction programs and more. For instance, the federal government pays a share of state Medicaid costs, from 50 percent to more than 75 percent, depending on a state’s wealth. The matching rates were temporarily sweetened by last year’s stimulus.
But Congress should pass legislation that would allow a state to simply get an “advance†on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.
Doesn’t that presuppose that Congressmen who are eager to appease the voters this year won’t be as eager in five years after the state has spent its advance without improving its future prospects for repayment?
If the federal government really, truly wanted to help the state and local governments there’s one thing that would do the trick: cut healthcare costs. Here in Cook County, as I’ve posted before, the county’s budget is being overwhelmed by rising healthcare costs. Other costs are rising no faster than revenues but healthcare costs are rising faster than any practical revenue source.
But Congress in its wisdom decided it couldn’t be bothered with that.
Update 2
I’m totally convinced. Excerpt for the part about how after the last recession, states did not find it politically easier to “cut spending”–they boosted spending twice as much as the rate of inflation. A refresher course from our May 2009 “Failed States” cover story, with its prescient subhed “After a long spending binge, governors go begging for a handout. It won’t be their last”
What you would need to do is appropriate funds to the states who submit a plan for federal approval with the required features. A broad outline might be a plan that is actuarially sound to bring state pensions into viability in x years. The feds could agree to a mixture of lump sum payments and/or matching funds. The state would have to agree to waive sovereign immunity by accepting payment and pass the required laws before money changed hands. If the state violated the plan, the feds could take their money back or stop payment.
The closest example of this would be the welfare reforms in the early 90s that the feds helped fund. Probably what the states need to do is shift to defined contribution plans, but that does not help address the past obligations and probably makes them worse. The states need an infusion of capitol (like welfare reform) to switch to a different approach.
OT: Did you see the startling confession reprinted at Kaus’ site that Obama was surprised that the idea of shovel-ready jobs was a lie?
Yes. I was amused by it as with Brad DeLong’s lament this morning. There appear to be quite some number of GooGoo Democrats (among which I would number both President Obama and Brad DeLong) who don’t recognize that there’s a difference between real Democratic politicians and the Democratic politicians they’ve imagined.
As a friend of mine said once upon a time (about Reagan as it turns out), childlike innocence is a beautiful thing but not in the president of the United States.
Yes, that’s how but it doesn’t address the problem of if. IMO most state pols would view this as an invitation to fall on their swords.
The State “officials” were boneheaded morons so…lets help them to remain boneheaded morons. Brilliant.
And the real problem isn’t just services. If it were just that then fine. The real problem is much much larger and pretty much hidden: state pension plans. Many states have defined benefits plans vs. defined contribution. In California the pension plan, if it were reported like a corporation has to report it, would increase the state’s deficit several fold. Whooops.
Policy (yay for government!!!!) has been really, really bad for the past few decades. We’ve run deficits when the economy was growing, we’ve expanded the size and scope of government as well, and we’ve made commitments at all levels of government that we simply cannot hope to live up to and have a robust economy.
We don’t need a Marshall plan we need a major rethink on how government works. We need to go in and redo health care, medicare, and government pension plans. If we don’t these things will continue to suck up more and more resources and act as a larger and larger drag on the economy. Everyone worries about things like corporations, global warming and such, but if we don’t get the three items I mentioned fixed the rest of these concerns will seem trivial. Of course we wont do this because democracy doesn’t work that way.
We are going to be in a period where economic growth above 2% is going to look really good.
Pardon me, but no fucking shit. Was Barry smoking the weed again when he was making those statements? How many people said that one of the problems with fiscal policy is that it is slow and ponderous. That these shovel ready jobs aren’t ready and likely wont be ready until the recession is over? Hello? Anyone there?
That was the point of my Foundations of Sand post earlier this week. Not only do we need a re-think of healthcare and government (at all levels) pension plans, we need to re-think trade policy, immigration policy, tax policy, energy policy, and environmental policy. As I’ve said before I don’t think the reform that’s needed is simply a matter of doing more or doing less. I think it’s doing differently. Which is a lot harder.