This is a long one, so I’ll keep most of it under the fold.
If you didn’t notice, there was quite a lot of pushback on my Krugman piece, and some of it I think was much deserved. So…
Let’s take Krugman’s larger thesis into account for a moment. Essentially Krugman is arguing for a larger stimulus. The one we got, he argues, wasn’t big enough. All it did was patch some holes in state and local budgets rather than go the next step and actually stimulate the economy. This is true as far as I can tell. I would gladly support more stimulus spending especially. I think we’re in essentially a balance-sheet recession. More spending makes sense especially at the interest rates Krugman is talking about. During a recession high levels of government spending can help turn around the economy; I think that keeping taxes as low as possible during a recession makes sense for similar reasons.
What worries me is that there really are structural problems that may get swept under the proverbial rug when stimulus dollars come in to bail out state and local governments.
Take Arizona, for example. Like Colorado Springs, Arizona has been under the sway of a bunch of anti-tax zealots. (They’re zealots for other reasons, too, but we’ll talk about that some other time.) In any case, low taxes are much more important to the legislators in Arizona than actually governing. So we get laws allowing concealed weapons to be carried without permits, but we can’t manage our budget even well enough to remain in possession of our own Capitol building. Our legislature refuses to raise taxes even though it means we have to let a bunch of state parks go to gravel – despite the fact that state parks are a major part of the tourist industry in Arizona. And while some states face real problems with overly powerful and entrenched teachers’ unions, Arizona is not one of them and yet still plans to cut millions from public education.
The anti-tax ideology is so deeply ingrained here that Jan Brewer, of all people, had to lead an effort to get a measly 1-cent sales tax passed by voter ballot – which it did, by a reasonably wide margin. There is some disconnect, I suspect, between the voters and the legislators here. I’m not sure it’s enough to throw the bums out, but I hope it is.
So I take Krugman’s point on the anti-government rhetoric being a driving force behind some of the structural problems facing the country. What I worry about in these instances is that all these stubborn, ideological lawmakers who refuse to raise taxes will end up taking a bunch of stimulus money and not having to own up to their own politics. They get bailed out. They get to slash spending on basic services, keep taxes low, and still get the money they need. Then what? They get reelected and do it all over again.
Where I depart from Krugman is this: I don’t think anti-government rhetoric has been the driving force across the board, nor does all deficit-hawkishness stem from anti-government rhetoric (anyone who wants to close up the budget deficit via tax hikes could be considered a deficit hawk, after all). I think this is a huge oversimplification. I think there are structural problems that are not related to anti-government rhetoric at all, but rather to mismanagement of money, spending levels that outpaced realistic revenue projections, and promises made to public sector workers that were too generous*. The public pension gap is a very real problem and hasn’t come about solely because of the anti-tax crowd.
States like New Jersey have enormous budget shortfalls and yet rank at the top of the taxation tables. Whether or not you agree or disagree with moves that Chris Christie has taken in New Jersey, the state government there for years spent more than it could realistically afford to spend. Perhaps this was merely too much exuberance during the boom years.
Either way, the structural problems in Jersey are different from those in Arizona or California, Colorado Springs or Los Angeles. From one state to the next, fundamentally different problems exist which defy broad assessments. While I support more stimulus spending, I worry that in each instance it will mask the underlying budgetary problems facing state and city governments. States that have spent too much won’t have to cut back on spending they never should have taken on; states that have under-taxed and substituted governance for ideology will be able to take the money and run.
Perhaps stimulus shouldn’t be tied to any sort of accountability. I’m not sure that’s the point of stimulus. But I do think that whenever we hand out money – whether it’s going to AIG or Alabama – we should require something in return, some proof that the money is going to not be misspent, that it won’t simply go to perpetuating bad behavior. Maybe some sort of Race to the Top for state and city governments.
Furthermore, I do think taxes are going to have to go up. We’ll probably end up with some sort of national sales tax or a VAT, as Bruce Bartlett has advocated on numerous occasions. I hope we can do this after the recession lifts. I think slashing government spending during a recessions is a bad idea, too. So long as private dollars aren’t flowing as people scramble to fix their balance sheets, lenders remain hesitant to lend, confidence remains low, I don’t see any serious problem with stimulus money keeping the boat from sinking.
I just think that we should couple all of this with accountability – not just from government but also for private companies on taxpayer life-support. We need to do away with the notion that any of these institutions or bureaucracies or banks or automakers can never fail – or else they’ll fail constantly and never pay for it.
And finally, I’ve mentioned this before, but I think one of the best ways to alleviate state budget woes would be for the federal government to take over Medicaid from the states. This would immediately free up a great deal of money that could go directly to patch up shortfalls in other state programs. Medicaid, meanwhile, would become a more universal program and would likely become more efficient, less prone to state budget woes. As Tyler Cowen notes:
The real fiscal problem is spending contraction at the state level (expanding and contracting spending are not symmetric in their effects; contracting spend hurts more than expanding spending helps). The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal. This would give state budgets a huge break, and help employment, yet as a one-time change it reduces the moral hazard problems from ongoing outright grants.
* [As a side note the above link on pensions is to a post by Kevin Drum which I heartily endorse. I’m not sure how we go about getting private sector pay and retirement benefits up to snuff, but it’s a worthwhile project. It’s also one of the downsides to globalism and a reason that I think a market economy, which I think is – like globalism generally – an undeniably good thing, requires state services like health care in order to keep society fair for workers, to boost economic mobility, and to keep consumer and worker confidence stable. One doesn’t have to be anti-public-sector to recognize some of the flaws in the current status quo. And the status quo only worsens if the economy doesn’t recover, as the future burden on taxpayers increases disproportionately with the promises made. Similarly, one can be pro-market and still realize that we need to do more to make society more equitable.]