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America does not have an expansionary fiscal policy

federal_stimulus_not_keeping_pace_with_state_local_woes.png

As everyone knows, the federal government is still spending a $700 billion stimulus package passed at the beginning of 2009. As most people know, state and local governments have had to sharply cut spending because the recession has decimated their tax revenues. But as fairly few people know, these two forces are canceling each other out. Stephen Gordon explains:

It's important to remember that the proper measure for fiscal stimulus is not spending by the federal government; it is spending by all levels of government. And when you look at the contributions to U.S. GDP growth (Table 1.1.2 at the BEA site), total government spending has been a drag on growth over the past two quarters. The increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels.

As you can see in the graph atop this post, as the stimulus spending begins to drain out, we're actually seeing the drag from state and local governments overwhelm the boost from the stimulus money. That is to say, the state and local cuts are bigger than the federal increases. As Gordon said, the U.S. economy might be recovering, but it's a slow recovery. "The question [is] how much better it could be doing if it had an expansionary fiscal policy."

By Ezra Klein  |  June 7, 2010; 11:00 AM ET
Categories:  Economic Policy  
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Comments

This traces back to Obama's original sin: the stimulus vote. By converting state/local support to tax cuts for the affluent -- for no real reason other than to woo Susan Collins and unfurl the banner of bipartisanship -- the President has probably made things worse, not better, for the country and for himself. Time to start the Draft Hillary for '12 campaign.

Posted by: scarlota | June 7, 2010 11:14 AM | Report abuse

all this is absolutely correct but Ezra you do know that "stimulus" can't go on forever, right?

The better thing to do would be to actually STIMULATE private sector jobs that could actually pay(in taxes) for all these lovely infrastructure projects everyone wants to do.

Posted by: visionbrkr | June 7, 2010 11:23 AM | Report abuse

How about that Helen Thomas story, eh, Klein?

The Washington Post doesn't cover news of big name anti-Semites if the anti-Semite is a liberal in good standing?

http://pajamasmedia.com/blog/the-washington-post-keeps-rockin’-hides-helen-thomas’-bigotry/?singlepage=true

That's the sort of dishonesty that Klein proudly flies his flag under.

Posted by: msoja | June 7, 2010 11:42 AM | Report abuse

GOP is going to counter this argument saying 'Thank God at least few States are showing the sense in stopping the profligacy of Fed. It is only because of Obama and Dem Congress that we are in so red. States are already eating their spinach but Obama is refusing at Fed level'.

What I think does not matter, what matters is how it is sold.

Posted by: umesh409 | June 7, 2010 11:47 AM | Report abuse

umesh,

you're absolutely right. The only issue I'd have is that its not "what matters is how it is sold". Its "what matters is how it is then in turn bought and how the voters choose to react"

Posted by: visionbrkr | June 7, 2010 12:04 PM | Report abuse

Don't tell the Republicans. They'll probably go and create a chart plotting GDP growth and 'net' fiscal stimulus, clearly showing stronger GDP growth as fiscal stimulus turns to fiscal drag.

In any case, good to know that GDP can grow at a 4.3% pace when government spending is shrinking.

Posted by: justin84 | June 7, 2010 12:08 PM | Report abuse

"But as fairly few people know, these two forces are canceling each other out."

I think people understand that, generally, even if they don't approve of the stimulus on principle. Many critics of the stimulus have noted that a lot of stimulus money to the states has gone to prop up state and local governments at previous levels of spending, rather than into the private sector.

So they understand that much of the stimulus money is offsetting the loss of local tax revenues, rather than going into above-and-beyond extra money getting pumped into the private sector.

Not a big fan of the stimulus, myself. I say, bring back the WPA.

Posted by: Kevin_Willis | June 7, 2010 12:09 PM | Report abuse

"So they understand that much of the stimulus money is offsetting the loss of local tax revenues, rather than going into above-and-beyond extra money getting pumped into the private sector."

Kevin_Willis,

WPA-style stimulus would be a great thing, but the point is that a dollar spent on a WPA job is pointless if there is also a dollar being cut at the state level that leads to the layoff of a teacher, a state patrol officer, a highway maintenance employee, etc. State spending is dedicated to the most essential public services like education, law enforcement, infrastructure maintenance, and vital services for the most needy. States don't waste a trillion dollars invading Iraq; their spending is integral to the economies of local communities. We damage our future economic growth if our states continue to slash investment in basic and higher education, roads and bridges, and provision of basic social services.

Saying that "a lot of stimulus money to the states has gone to prop up state and local governments at previous levels of spending, rather than into the private sector" is a non sequitur. Preventing the layoff of a school teacher or other state employee involved in the delivery of essential public sector activity is the best first use of stimulus dollars. Otherwise there can be no above and beyond "extra" effect of your desired WPA.

Federal stimulus taking place at the same time as state layoffs is the equivalent of trying to fill up a bucket full of holes. First you must plug the holes, then you add the water.

Posted by: Patrick_M | June 7, 2010 1:00 PM | Report abuse

Patrick,

that's all well and good but don't you think we should STIMULATE private sector jobs FIRST (or should have some time ago??). Its the natural cycle to do that and then the tax revenue from those jobs could fund government projects, teachers salaries etc so we wouldn't have to do such an over-reaching stimulus project.

Posted by: visionbrkr | June 7, 2010 1:18 PM | Report abuse

Why not pursue an expansionary monetary policy instead of a fiscal policy? Don't make more debt, make more money. I suppose this is what China is trying to block via the currency peg.

Posted by: staticvars | June 7, 2010 1:53 PM | Report abuse

visionbrkr,

When the state highway department employee picks up up his paycheck and spends it at the grocery store, the Home Depot, the appliance store, or wherever, that IS stimulating private sector jobs, by creating demand in the private economy that will not exist if that person is laid off (and the collects unemployment compensation from the taxpayers as the roads deteriorate).

Posted by: Patrick_M | June 7, 2010 2:07 PM | Report abuse

Patrick,

I get that but its stimulating private sector jobs to a much lesser degree (IMO) than if they were doing MORE to stimulate jobs in the private sector. That's why I was so ticked off at both Dems and Republicans for weak jobs bills to date.

I'd love to see a "NON BIASED" (ya like that's possible) data set that shows dollar for dollar correlation to jobs bills focusing on the private sector to jobs bills focusing on the public sector.

Again I'm sure the non biased version doesn't exist. Both sides would taint it.

Posted by: visionbrkr | June 7, 2010 2:23 PM | Report abuse

--"When the state highway department employee picks up up his paycheck and spends it at the grocery store, the Home Depot, the appliance store, or wherever, that IS stimulating private sector jobs"--

Typical dim collectivist thinking that only considers half the equation. The state highway department employee, who spends a LOT of time standing around doing nothing, is paid with money stolen from the grocery store, the Home Depot, the appliance store, etc. That theft destroys the wealth, health, and facility of each of those entities to the same extent it stimulates the recipient of the theft, or is, in fact, de-stimulative, overall. Crime is not good economics.

Posted by: msoja | June 7, 2010 2:37 PM | Report abuse

"Harvard study shows earmarks cost jobs"

http://www.washingtonexaminer.com/opinion/Harvard-study-shows-earmarks-cost-jobs-95637114.html

Posted by: msoja | June 7, 2010 2:46 PM | Report abuse

"Why Obama’s Stimulus Failed"

http://blog.heritage.org/2010/06/07/morning-bell-why-obamas-stimulus-failed/

Posted by: msoja | June 7, 2010 2:48 PM | Report abuse

visionbrkr,

Since government (by definition) can't simply "create" a public sector job, such efforts are necessarily indirect, in the form of taxpayer subsidies to certain private sector endeavors (through tax breaks, loans, etc.) or by funding public works projects that will employ private contractors. It is less efficient that when X amount of stimulus dollars is directed at providing payroll that would otherwise by cut, or writing paychecks directly for a job that has been created. Those paychecks flow back in to the private economy, and those workers pay taxes too, so much of their payroll comes right back to the government that employs them.

The study that I would like to see concerns the "efficiency" of cutting a public sector job, losing the value that the worker added to the economy through teaching, law and order, infrastructure maintenance, etc., losing the taxes that were paid by the public employee back from his or her earnings, causing that employee to depend upon the state for unemployment and other benefits, and the resulting loss of demand in the private sector when that employee's income is taken away. How much does the taxpayer really "save" (after everything is factored in) after a layoff such as this?

Kevin_Willis is liking a WPA strategy. I'd support both your approach and Kevin's, but only after we first stop digging our own hole by moving needed state employees off the payrolls and on to the dole.

Any stimulus approach that does not take into account the basic facts in Ezra's post about the lack of net expansion is in line with my leaky bucket analogy.

Posted by: Patrick_M | June 7, 2010 2:52 PM | Report abuse

msoja,

thanks for the biased ones ;-)

So why not a payroll tax holiday instead? Or better than a holiday reduce the payroll tax rate. I know that'd get me to hire an employee or two because the payroll taxes i pay absolutely stop me from hiring.

As far as the public sector cuts I'd be fine if they were on par with what the private sector makes. I don't necessarily want to cut (although I obviously don't see what they do etc). I want to make sure its not wasted and where I live i see a LOT of government waste. And when Governor Christie wants to keep that in line the state of NJ unions step in the way and whine as they do. Plus they spend millions in advertisements showing sad teachers working with kids and play on people's sympathies. Its really pathetic. Spend that money on reducing costs instead of marketing and selling the union.

How bout we start with a porn filter at the SEC and MMA? How many other government agencies that we haven't heard from have issues like that?

Posted by: visionbrkr | June 7, 2010 3:00 PM | Report abuse

"As far as the public sector cuts I'd be fine if they were on par with what the private sector makes."

I am sorry, visionbrkr, but I just don't see the logic. The idea of counter-cyclical stimulus is to REPLACE the demand that falls out of the private sector, not to match it.

"I want to make sure its not wasted and where I live i see a LOT of government waste...porn filters..."

Nobody would argue with reducing waste, or in favor of government employees surfing porn on the Internet. If you think that there are no workers in the private sector wasting time online (and in other ways, I think you would be surprised). Good efficient management that will best accomplish the mission of an agency with the workers that are available is a value we all share. But that is another issue outside the crucial point in Ezra's post that we are now in a place where "the drag from state and local governments overwhelm[s] the boost from the stimulus money." Any meaningful policy discussion about the utility of future jobs bills and stimulus needs to take this fundamental problem into account.

Posted by: Patrick_M | June 7, 2010 3:17 PM | Report abuse

Patrick,

I didn't mean cuts in jobs I meant cuts in salary/wages or even just stop the increases. Then replace that with private sector job growth.

sorry i wasn't that clear on it.

So if for example we were to tell public sector employees across the country there would be no 4% standard increase (or whatever it is) and we'd take that 50 billion dollars (or whatever that comes to) and spend it WISELY in private sector job growth that would be an A+ Great job in my book!

I'm sure it happens in private sector jobs too but again if people do that on their time in the private sector I'm not paying for it. If employers want to block internet access for their employees then that's their right. I know many that do.


Again my point is that the drag from the state and local governments wouldn't be such a drag if government workers weren't getting raises during recessions. Sorry but the private sector is and has been buckling down. Last year I believe i read somewhere that the Federal government's agencies increased their funding on average of about 11%.

Sorry that's not fiscal responsibility.

Posted by: visionbrkr | June 7, 2010 3:25 PM | Report abuse

visionbrker:

"Again my point is that the drag from the state and local governments wouldn't be such a drag if government workers weren't getting raises during recessions. Sorry but the private sector is and has been buckling down. Last year I believe i read somewhere that the Federal government's agencies increased their funding on average of about 11%."


Again, we are talking about the states slashing their budgets (so any increase in the budgets of federal agencies is being offset). Yes, of course the private sector has been "buckling down," but the idea of countercyclical stimulus is to offset that "buckling down" in order to preserve and boost the demand in the private sector. Whether you lay off some public employees, or whether you cut salaries to all of them, you are creating an anti-stimulative result.

I don't know what study you are referring about budgets for federal agencies, but when it comes to the public sector jobs as a percentage of overall employment in the USA, there was a steady trend of decline in that ratio during the Clinton era with just a slight uptick during the Bush years:


http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=N#S6

see: 6.5C and 6.5D

Posted by: Patrick_M | June 7, 2010 3:54 PM | Report abuse

Boost my rectum. what jumpstarted all down turns was reduce Fed spending and taxes. JFK knew this and was a C student at Hawvud.
Ronnie new it and both were Dems when they learned this simple rule lower taxes Fed revenue goes up!!! Duh. There is no way you can borrow and spend your way out of debt or to properity. Our fiscal policy needs to model China. If you do not have the money in the treasury do not spend the money.

Posted by: don1taylor | June 7, 2010 5:19 PM | Report abuse

--"[T]he idea of countercyclical stimulus is to offset that 'buckling down' in order to preserve and boost the demand in the private sector."--

Duh... duh... duh.

Why not just print a bunch of money and give it to all one's properly politically aligned friends.

Oh, right, that's what they've done.

And it hasn't worked.

It didn't work in the Great Depression.

And it's not working now.

And the hell to pay part is still to come.

Posted by: msoja | June 7, 2010 5:35 PM | Report abuse

visionbrkr "Stimulate Private sector" jobs - they have been Stimulated OUT OF THE US.

Bailouts to the Banks of US Taxpayer dollars - Increased Outsourcing of Jobs - by the Banks. - "Mar 9, 2009 ... JPMorgan Chase to Increase India Outsourcing 25%" -- "Bank of America sets up Indian outsourcing subsidiary" --"Citibank to absorb Indian outsourcing firm"

We need serious penalties to corporations who outsource jobs out of the US - and profit off of that outsourcing.

Posted by: fair001 | June 7, 2010 6:29 PM | Report abuse

--"We need serious penalties to corporations who outsource jobs out of the US - and profit off of that outsourcing."--

The soviets had the right idea, don't you think? I mean, in Berlin.

If we put a wall around the U.S. so the corporations and rich couldn't get out, think of the jobs it would create!!! Why, the guard towers would employ millions! You should spiffy up your resume, quick!

Posted by: msoja | June 7, 2010 7:23 PM | Report abuse

Why the heck is this chart in percentages instead of raw dollars? Completely misleading. Any country borrowing as much as we are, versus revenues, has expansionary fiscal policy. It's completely unsustainable, and we need to get people back to work, not just increase the number of people that feel like welfare is owed to them. You've got to earn it people.

We all know the problem is that social security and medicare, and now medicaid, are no longer "time bombs", they are exploding, we can't afford them, and we need to cut benefits, starting with the people that don't need them. Unfortunately the gutless slime we keep electing because they lie to us and say they have found the magic Keynsian solution to all of our problems won't make the cuts. Given that, we have two choices, big time inflation or default. I'd pick inflation.

Posted by: staticvars | June 8, 2010 10:11 AM | Report abuse

I work for an urban public library as the grant writer. We had a budget of $14.8 million in 2009 (the vast majority of which is salaries and benefits), with a main library in the central business district, and 10 branch libraries in neighborhoods, in a medium-sized city with a population of 300,000. It's a northeast city, which is 55% African American, 30% Latino, and a long history of disinvestiment. The economic climate in the city was picking up until the Great Recession, but we didn't feel the impact of lost tax revenues until this year.

In mid-May the library administration was told by City Hall to cut the budget for 2010 by 15 to 25% (that's $2.2 to $3.9 million)--in our current fiscal year. To do this the administration and the trustees (it's a public oversight board, not a fund raising board, for those of Ezra's readers who know the difference in the nonprofit world) adopted a plan to increase the furlough days (originally set at 12 days without pay this year -- a 4% pay cut) to 38 furlough days, a 13% pay cut. And because it has to be done in the current fiscal year, 35 of the furlough days will occur in 4.5 months. So from mid-August until the end of the year, we'll effectively have a 40% pay cut.

The library administration will also close two branches, is cancelling our free homework assistance program, our free ESL classes, laying off 17 part-time staff members, canceling contracts for uniformed security guards (we had to go the contract route for them since there was a hiring freeze), and slashing the book budget to practically nothing. Saturday hours will be eliminated at the 8 branch libraries that remain open. Main Library will be open 40 hours a week instead of 60 hours.

In this city, the Library is where people come to use a computer, since most households do not have a computer or internet access -- in fact, in 2009 over 800 people used a computer each of the 300 days we were open.

And we've been told that we'll need to reduce the 2011 budget to $8.8 million, which means layoffs, closing the remaining branches, and further reductions in hours.

I'd love to hear from Ezra's commenters about how to live on a 40% pay cut. And how to serve the public when you're only open 3 or 4 days a week.

Posted by: njprogressive | June 8, 2010 2:22 PM | Report abuse

--"I'd love to hear from Ezra's commenters about how to live on a 40% pay cut. And how to serve the public when you're only open 3 or 4 days a week."--

You might drive around and look to see if Barnes & Noble or Borders are in similar straits, and ask yourself what the difference might be.

If you insist on tying your wagon to a government horse, don't be surprised (and don't come 'round complaining) when the thing drives off with all your precious cargo. It's the arbitrary nature of the beast, and people have been telling you about it for years.

Posted by: msoja | June 8, 2010 6:13 PM | Report abuse

ps. Also, see Facts of Life. Word has it that life's unfair. Again, nature of the beast. Ball of rock floating in empty space stretching for eternity. We're lucky to be here at all. The government is not some God who rewards people who care enough. Face it. You were lucky enough to be born in the United States, land of the free (barely) and home of the brave (fading). You're way ahead of most of the humans that have ever lived.

Posted by: msoja | June 8, 2010 6:23 PM | Report abuse

pps. Now imagine your public library is a big beautiful socialist health care system.

Posted by: msoja | June 8, 2010 6:26 PM | Report abuse

I'd love to hear from Ezra's commenters about how to live on a 40% pay cut. And how to serve all those people banging on the emergency room door when you're only open 3 or 4 days a week.

Posted by: msoja | June 8, 2010 6:28 PM | Report abuse

//cite
[Chicago Public Schools] estimates it can shave about $125 million off its budget by increasing class sizes from the maximum of 32 students to 35.
//end cite

http://www.nbcchicago.com/news/local-beat/Unions-Plan-to-Sue-CPS-95853409.html

And, of course, instead of allowing the private sector to properly diversify the country's education assets, they, too, like your public library, are tied to the anchor of government "ownership". All the eggs, in one flimsy basket.

Posted by: msoja | June 9, 2010 12:35 PM | Report abuse

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