Tag Archives: fiscal policy

Why the Federal Government Shouldn’t Use the States to Implement Fiscal Stimulus

[C]hannelling the stimulus package through state governments exposed it to agency costs, free-riding problem, and political expediency. As a result, the stimulus has failed to meet its objectives at the state level. The lesson is that fiscal stimulus should be conducted centrally.

That’s Robert Inman, writing over at Vox. He summarizes forthcoming research with Philadelphia Fed economist Gerald Carlino (I don’t believe the draft is on line yet). They find:

[A]n income multiplier for federal transfers to states of only 40 cents for each dollar of federal aid even after 20 quarters.

He also sums up his solo paper on states in fiscal distress:

ARRA’s assistance was largely distributed as a per capita transfer. Projected fiscal deficits did lead to more assistance, but ARRA covered at most $0.25 of each dollar of projected state budgetary shortfalls. The other important determinant of ARRA funding was whether the state’s Senators had membership on an important congressional committee making fiscal policy. Controlling for state population, deficits, and committee membership, the state’s rate of unemployment at the time of passage had no statistically significant impact on the level of assistance.

These results largely corroborate Veronique deRugy’s work.

Pension Reforms from California Progressive Leaders

California’s pension tsunami is a few years from decimating the cities. In 2015 it is estimated one-third of Los Angeles’ budget could go to pay for employee retirement costs. Steven Greenhut reports at City Journal these facts have touched off calls for reform not just among fiscal conservatives but among several prominent progressive leaders in the state.

San Francisco Public Defender Jeff Adachi is a Democrat and the sponsor of “Proposition B” or the Sustainable City Employee Benefits Reform Act which will appear on the November ballot. If passed, the measure requires uniformed police and firefighters to dedicate 10 percent of their income to their retirement.(City employees would have to increase their contributions to 9 percent).

While unions and their political backers are likely to challenge any alteration to the status quo, a shift in thinking may be taking place, as Greenhut reports. Governor Schwarzenegger’s pension adviser, David Crane, points out the price for ignoring pension reform is less public funding for progressive programs. That tradeoff is real and significant. In the next five years the cost for San Francisco’s employee benefits are slated to rise from $413 million to $1 billion. Charles Lane writing at The Washington Post puts it another way: “Nothing threatens the political consensus of progressive government more than the widespread impression –and reality– that public employees have captured government.”

In other words, profligate fiscal policy doesn’t just affect taxpayers and weaken economies. Unsustainable spending also harms beneficiairies by undermining expectations and trust — a recipe for dysfunctional government.

Resurrecting the New Deal in Perry County, Tennessee

While many cities and municipalities are still seeking approval on projects that propose to use federal stimulus money, a Tennessee county has used a different model to attempt to employ as many of its citizens as quickly as possible. The New York Times details the county’s efforts to put stimulus money to work in an area where unemployment levels recently exceeded 25 percent.

Rather than waiting for big projects to be planned and awarded to construction companies, or for tax cuts to trickle through the economy, state officials hit upon a New Deal model of trying to put people directly to work as quickly as possible.

They are using welfare money from the stimulus package to subsidize 300 new jobs across Perry County, with employers ranging from the state Transportation Department to the milkshake place near the high school.

Given the constraints of the American Recovery and Reinvestment Act, Perry County may be maximizing the potential of these federal dollars to lower current unemployment rates.  The Tennessean reports that the immediate effects of this program have been successful:

The centerpiece of an innovative job-creation program has put 300 residents to work temporarily, including 200… who are employed in the private sector, working at the local country club, insurance offices, hardware stores, trucking firms and the Subway sandwich shop.

What sets this program apart from other stimulus-related ones around the nation is that workers’ wages and benefits are paid directly by federal funds. It is the only stimulus initiative in the country like this, at least on this scale, according to federal Health and Human Services officials.

Aside from the local benefits of rapidly spending its ARRA allotment, the Perry County model is likely a better attempt at effective discretionary fiscal policy than has been witnessed in places that have yet to begin spending their stimulus money. A standard critique of discretionary fiscal policy is that is has long lags before taking effect, meaning that changes in taxing or spending in response to changes in the business cycle are likely to exacerbate, rather than smooth peaks and troughs in the business cycle. If it is possible to create spending programs that minimize these lags, Perry County has likely done just that.

As with other programs using stimulus funding, however, seeing success in Perry County’s unemployment reduction relies on a short-term view of economic heath.  The jobs funded by ARRA will likely disappear once these funds run out and public support for job creation wanes.  A local television news station explains:

The jobs are only temporary and will end a year from September. County Mayor John Carroll says the jobs are just a bandage: stopping the bleeding, but not a permanent fix.

Federal spending in places like Perry County has the potential to help people weather the current recession, but it may do more long run harm than good. Many manufacturing jobs that were once located in America are now outsourced to places where they can be executed more cost-effectively, but this trend does not require federal support to artificially create jobs for low-skilled domestic workers.

Instead, for long-term economic health, former manufacturing centers need to allow the private investment to direct their labor pools toward their new comparative advantages.

More on Texas and California

The cover story of this week’s Economist discusses Rich States, Poor States, the report published earlier this year by the American Legislative Exchange Council.  The subject of an earlier post, the book attributes Texas’ rapidly growing domestic-born population to low tax rates and favorable business conditions and suggests that California’s loss of domestic population is due to a state government that has grown unsustainably large.

The article points out that in addition to increasing numbers of native-born Americans, Texas along with many other states is experiencing large increases in its population of immigrants from Mexico and Central and South America.  While these large numbers are presenting some challenges to the state’s healthcare and education systems, another piece points out:

Texas has proved far better than the other border states (California, New Mexico, and Arizona) at adapting to the new, peaceful reconquista. In California, Proposition 187, which cracked down hard on illegal immigration, was heartily backed by the then Republican governor and passed in a referendum in 1994, though it was later struck down by a federal court. This kind of thing has only ever been attempted in Texas at local level, and even then only very rarely.

For the most part, Texans seem to see immigrants as adding to the diverse skills in the labor market, increasing the size of the economic pie for all of the state’s residents, rather than acting as a drain on fixed resources.

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Rudolph Giuliani to Albany: Constitutional Convention to Fix State Government

Former New York City mayor Rudolph Giuliani makes the case in an op-ed in today’s New York Times for a state constitutional convention to address the state’s economic ills. New York is just behind New Jersey with the second highest state and local tax burden in the nation. And like other ailing states (California and New Jersey), New York is dealing with the recession by hiking taxes.

A constitutional convention would consider the rules and incentives under which the state and its elected officials operate. Giuliani makes seven specific recommendations including reforming the budget process, term limits, and a supermajority vote for tax increases.

The specific proposals he offers are not necessarily silver bullets. For instance, ensuring the budget adheres to generally accepted accounting principles is an excellent idea. A supermajority vote for tax increases may or may not be effective, depending on how it is linked to other rules — such as spending limits.

A strong tax and expenditure limit, like the Taxpayer’s Bill of Rights (TABOR) in Colorado, requires that voters approve any spending beyond what population growth and inflation allow.

Giuliani’s proposal is a good one because it gets to heart of the matter: the rules under which elected officials create fiscal policy. New York’s fiscal institutions need review and reform. It is something other states would do well to also consider.

New Paper on Stimulus and the States

Let me begin with one caveat: this blog is not going to feature excessive self-promotion. A string of press releases do not a blog make.

With that out of the way, I want to bring your attention to a new policy brief by Eileen Norcross and Frederic Sautet entitled “The Main Street Economic Recovery Proposal: Will It Bring Us Out of Recession?” Clearly, stimulus package focusing on “shovel-ready” projects will invariably be played out on the state and local level.

In the paper, Norcross and Sautet recommend:

Instead of engaging in activist fiscal policy, the government should announce a policy of fiscal prudence promoting lower public spending and thereby creating a good context for entrepreneurial activity.

1) Let the price mechanism run its course. Prices in some economic sectors have been artificially inflated for too long. Downward adjustment of prices will release resources from unprofitable sectors to more profitable ones where they are most useful.

2) Restore a climate favorable to entrepreneurial discovery and innovation. In order to discover new business opportunities, entrepreneurs must have the confidence that they can invest and be rewarded for it. But while the institutional environment must reward entrepreneurial activity, it should not socialize losses by subsidizing failure.

Fred and Eileen also wrote about the states and stimulus in November in Forbes.