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When did 'more economic pain' become a popular position in American politics?

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There are economic problems that we can't do much about. An oil embargo from OPEC, for instance. Or an asteroid hitting Wall Street. But then there are economic problems we can do something about.

Cities firing hundreds of thousands of workers is a problem we can do something about. It's a simple question of money: The recession has destroyed state revenues and most states can't run deficits. Luckily, the federal government can give states aid until unemployment falls back down to 6 percent. It could even give them aid in a form they have to pay back.

But Republicans are blocking state aid bills. This doesn't make a lot of sense, even on their own terms. On Sunday, John Boehner said, "I am not for raising taxes on the American people in a soft economy." That's fine: Tax rates are a part of the economy we can control, and Boehner sensibly doesn't want to let them become contractionary while we're in a recession. But that same thinking applies to state employees: No one should be for laying off hundreds of thousands of public-sector workers in a soft economy. This is something we can control; it's a contraction we can stop. We just ... aren't.

And that's not all: We could pass a payroll tax holiday, a seriously large tax credit to help business hire, much more infrastructure investment, and on and on. We could do lots of things. We just ... aren't.

The same goes for the Federal Reserve. I haven't seen really persuasive estimates of how much they could do to support the economy, but everyone agrees they could do more. They just ... aren't.

There's much in the economy that's out of our control. But there's a lot that's in our control. But Republicans in our political system and hawks inside the Federal Reserve have, for very different reasons, decided to back off. So while the economy we can't control is slowly, slowly getting better, the economy we can control is getting a lot worse. We saw this in July, when the 71,000 jobs the private sector created were wiped out by the 200,000 jobs the public sector lost. Economic pain is bad, but unnecessary economic pain is appalling.

By Ezra Klein  |  August 10, 2010; 11:23 AM ET
 
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Comments

"No one should be for laying off hundreds of thousands of public-sector workers in a soft economy."

Here in Florida, GOP governor candidate Rick Scott has ads running on TV promising to cut the number of state gvmt workers. He is doing so because LOTS of conservative voters believe t is proper to eliminate any or even most gvmt jobs.

Ronald Reagan and his later follower have convinced every day Americans that the US gvmt is akin to a foreign occupying force and every gvmt job is a waste.

These same people also think that the best economy is one in which any gvmt involvement is a hindrance or a detriment, which means they really dont understand that traditionally we have had a close partnership between gvmt and private enterprise and that a well functioning economy requires a well functioning gvmt as well.

It is no mystery why the GOP is blocking state aid. They absolutely want to destroy every gvmt job possible in their goal of a libertarian utopia. Stange thing is I have three family members who have state gvmt jobs who are planing to vote for GOP candidates yet again.

Posted by: lauren2010 | August 10, 2010 11:35 AM | Report abuse

"We saw this in July, when the 71,000 jobs the private sector created were wiped out by the 200,000 jobs the public sector lost"


Whoa Whoa Whoa Ezra. I thought that most of those were "temporary census jobs" that were going away anyway? Don't tell me you don't subscribe to Rahm's theory of don't let a good crisis go to waste (and then you can add) even if you have to fudge the data!

Posted by: visionbrkr | August 10, 2010 11:40 AM | Report abuse

This begs for a perverse incentive structure though. If the government is going to send money to states whenever they can't afford to pay their employees, then the rational response from the states is to not bother taxing their citizens and hire lots of people.

California's constitution, for example, precludes it from being able to obtain sufficient revenue to run a state government. this is not a problem that should be resolved by other states pitching in to cover for them, it's a problem that needs to be resolved by california fixing their fundamental constitutional problems.

Posted by: eggnogfool | August 10, 2010 11:46 AM | Report abuse

Economic pain is sometimes a necessary part of recovery.

Consider the question asked in a Salon opinion cited earlier this morning -- "Is Any Job Better Than No Job?" The answer, of course, is yes: eating is better than starving, therefore having a low-paying job which enables eating is better than having no job at all.

By removing the specter of starvation, we also remove a degree of incentive -- we change the decision-making process, making one fork in the road look unnaturally attractive. If there is no harm in making a wantonly foolish decision, many will depend on what is supposed to be a backup -- the safety net becomes the ordinary walking path.

So, it's unwise to bail out California and other states making wantonly foolish fiscal decisions. Perhaps the few moments of suffering will be remembered and will lead to better decision-making in the near future.

Posted by: rmgregory | August 10, 2010 11:48 AM | Report abuse

just make everything better.
no more suffering. no more poverty. no more meanness.
no more oily pelicans. no more magazine pictures of women without noses. no more fighting. no more children without food and flies on their fingers.
too hard.
WAH! WAH!

Posted by: jkaren | August 10, 2010 11:48 AM | Report abuse

Reducing headcount below required levels is idiotic. The problem is compensation, not necessarily bodies.

Let's say a state needs to cut its wage bill by 8%. Firing roughly that proportion of workers and keeping salaries unchanged (or in many cases keeping the annual raise intact) is not the way to go about it, unless the state is itching to get rid of those workers.

If the services are valued, the state should simply cut salaries (I'd say targeted cuts to avoid hitting high performers but in a unionized world they will probably be across the board) so that services can be maintained.

Firing government workers can actually create jobs. Several cities around the country have been getting rid of their unionized work forces and turning to contractors who work for far more reasonable amounts - given much lower unit labor costs, more people can actually be employed than before if so desired.

State and local governments should be trying to get the best services for the lowest price. Period.

Posted by: justin84 | August 10, 2010 11:54 AM | Report abuse

Thanks for the analysis provided by a simpleton/JournoLister.

Seriously, "[l]uckily, the federal government can give states aid until unemployment falls back down to 6 percent"?
So someone who lives in a state that might actually have some semblance of freemarket capitalism and fiscal discipline has to bail out states that don't (e.g., California)? Some people and governments (state, county, and local) might actually object to that arrangement. And what if those states and other governments that aren't disciplined continue to create more unemployment through their reckless policies, thus never achieving your 6% goal? Why reward failure and punish people and states that are disciplined?

Posted by: jcannes76 | August 10, 2010 11:55 AM | Report abuse

"If the government is going to send money to states whenever they can't afford to pay their employees, then the rational response from the states is to not bother taxing their citizens and hire lots of people."

Which is exactly what the states did in the last several years before the recession. This is just another way those who save are being asked to pony up for those who don't. How much should our children be asked to repay in order to preserve every last position at the DMV today?

Posted by: tomtildrum | August 10, 2010 11:56 AM | Report abuse

--"No one should be for laying off hundreds of thousands of public-sector workers in a soft economy."--

Why not? Heck, I'm for it in any kind of economy.

Posted by: msoja | August 10, 2010 11:57 AM | Report abuse

I think all this is projection on the R's part. They think they should suffer after their free-spending Bush years, so they're making everyone else suffer too.

Posted by: mschol17 | August 10, 2010 12:03 PM | Report abuse

Sometimes Ezra seems incredibly insightful. Other times he seems incredibly naive (perhaps willfully so).

He title suggests that the GOP things "more pain is good". In and of itself, that is silly. The question is one of perspective. Is dumping billions of dollars into the states a worthwhile effort, if it only postpones the inevitable, while simultaneously making the economic situation for our children worse?

I have seen zero evidence, here or elsewhere, that just one more "fix" of government spending being provided to state and local governments will help us turn the corner. On the contrary, there are a number of states with serious long term fiscal problems, and the latest "stimulous" will only punt the problem into next year. In the face of this reality, Ezra counters with articles arguing that outrageously expensive government benefits aren't a problem, its the lack of such benefits elsewhere that is a problem (i.e. don't make the government cut spending, instead all other employers should increase spending).

Count me among those voting for aid to the states only in conjunction with real evidence of fiscal sanity returning, and real concessions by government unions.

Otherwise this is just an enormous sop to the Democratic union base.

Posted by: WEW72 | August 10, 2010 12:03 PM | Report abuse

I think all this is projection on the R's part. They think they should suffer after their free-spending Bush years, so they're making everyone else suffer too.

Posted by: mschol17 | August 10, 2010 12:04 PM | Report abuse

Answering your question narrowly I would have to say it probably became an increasingly popular position after massive bankster bailouts (including, but by no means only, tarp) were enacted against the will of the people in such a crony like fashion, with the justification being it has to be done or we suffer "more economic pain". The blowback from engaging in such a disgusting display of public corruption while giving that particular justification is that the stated goal of that public policy becomes tainted when associated with actions by a discredited government which has previously utilized it in such a despicable fashion. It may be a good thing, it may be a bad thing, but confidence and credibility were spent on behalf of financial sector cronies and that choice has broad consequences in the realm of public opinion.

Posted by: mrnegative | August 10, 2010 12:07 PM | Report abuse

The latest tactic of the GOP to divide American workers is to pit everyone else against public sector workers. Why should public sector workers get lifetime health care when they retire and liveable pensions when no one else does (except when they get Medicare)? I even saw a graphic on CNBC that said that the average federal worker now makes much more than the average private sector worker.

This is just more divide-and-conquer from the private sector patrons of the GOP. The problem is not so much with the public sector as with the private sector, which has cut wages and salaries and benefits and hours to squeeze more and more profit from fewer and fewer workrs while CEO pay and perks go to the stars. (Look at Mark Hurd's severance package from HP after he screwed up!) So rather than have people notice the growing income gap, let's just direct their anger toward the supposedly well-paid public sector workers.

Actually, if the CNBC graphic was true it is because most public sector workers now are educated and skilled. The public sector doesn't run fast-food joints and contracts out things like janitorial services now. These are low-paid service workers. My guess is that correcting for education levels, the private sector still pays more. And of course some public secotr workers do tough things like protect us (police, fire, military).

In short, what's wrong is not that public sector employees get more but that the bulk of the workforce has seem its incomes drop while the top 2% got all the gains.

Posted by: Mimikatz | August 10, 2010 12:13 PM | Report abuse

When jcannes76 writes: "Some people and governments (state, county, and local) might actually object to that arrangement. And what if those states and other governments that aren't disciplined continue to create more unemployment through their reckless policies, thus never achieving your 6% goal? Why reward failure and punish people and states that are disciplined?"

I'm curious as to which states he or she would identify as "disciplined"? As Ezra has pointed out in the past, the majority of red states are indeed ...... welfare states.

"here is a very strong correlation, then, between a state voting for Republicans and receiving more in federal spending than its residents pay to the federal government in taxes (the rust belt and Texas being notable exceptions). In essence, those in blue states are subsidizing those in red states."
http://voices.washingtonpost.com/ezra-klein/2010/04/the_red_state_ripoff.html

The majority of states south of the Mason Dixon line (old confederacy - states rights) and west of the Mississippi ( rugged individualism, but don't cut my water subsidy or free grazing rights on federal land) that claim they have fiscal discipline are on federal welfare already.

They suck off the federal teat as they receive more in federal tax dollars than they pay in federal taxes. Many of no state income taxes or very low state income taxes because they depend on federal money. So, in a real sense, the "disciplined" states have exported their inability to sweep in front of their own door and dropped their anchor baby of liabilities on the federal doorstep.

As we go through the worst recession since the Great Depression, those same states complain about deficit spending to make up for a loss in aggregate demand. Talk about no good deed going unpunished.

I love the proud fiscal "discipline of a state that get's more money from the feds than what it pays in, just love it. Classic conservative delusion. The red states are welfare queens, complaining that they can't afford gas for their rusty old Cadillacs.

Hilarious.

Posted by: gregw571 | August 10, 2010 12:14 PM | Report abuse

@Justin84:

Problem is that the cost of an employee isn't their wage, it's their wages + benefits + other per employee overhead.

As a result, cutting salaries by 8% saves far less than 8% on labor.

Posted by: eggnogfool | August 10, 2010 12:20 PM | Report abuse

What makes you think that Republicans and Fed hawks are motivated by "very different reasons"? Why can't we just admit that they're all acting in class solidarity with the ruling financial elite? I'm no Marxist when it comes to nationalizing the means of production and all that, but for God's sake, if you're not going to treat class solidarity as a major motivating factor in political decisions, then you're never going to be able to make any sense out of anything.

Posted by: CynicalJerk | August 10, 2010 12:24 PM | Report abuse

Very disappointing, again, on the fact to spin ratio Ezra.

I have a big gripe with this spin: "But Republicans are blocking state aid bills. This doesn't make a lot of sense, even on their own terms."

Ezra, smaller government and improving government efficiency and effectiveness, what Liberals call austerity, is the route that has been chosen by ALL the other 19 members of the G20 to heal their economies! How can you judge that it, "doesn't make a lot of sense?"

That approach has already proven itself in Canada and Germany. It has also been successful in Indiana, Texas, and South Dakota. How can you say it doesn't make sense?

Posted by: mgsorens | August 10, 2010 12:24 PM | Report abuse

And most of the folks here seem woefully ignorant about the economics of state governments. First, all but one or two states are required by their constitutions to run balanced budgets. They have no choice. Most states built up huge rainy-day funds during the boom years--more than they had ever run before. Ezra and others have reported on this. But it wasn't enough because we are still feeling the effects of THE BIGGEST RECESSION SINCE THE GREAT DEPRESSION. States depend on income and sales taxes, which drop during a recession. Hence the shortfalls, and layoffs.

California is a separate case because in CA the people can legislate spending through initiatives but the budget must pass with 2/3 of the Legislature and the GOPers refuse to vote for any new taxes. CA got into a hole because Pete Wilson (R) cut the top income tax rate when he was Governor and Schwarzenegger (R) cut the car tax when he came in and there hasn't been anything to make up the lost revenue. It all went to hell when the recession hit.

People, we are falling behind most of the rest of the world in education. Communities are plowing up paved roads because they can't afford the maintenance costs. Other countries, especially China, are outstripping us in green technology while people here want to return to some agrarian small-government past that died a century and a half ago.

Posted by: Mimikatz | August 10, 2010 12:27 PM | Report abuse

@gregw571: "there is a very strong correlation, then, between a state voting for Republicans and receiving more in federal spending than its residents pay to the federal government in taxes"

That's actually not the same thing, though. Getting back more in earmarks (some of which is inevitable--states with the richest cities will get similar amount of money back for infrastructure, which costs similar amounts from state to state, yet due to progressive taxation will pay significantly more; in any case, that's an artifact of progressive taxation, not a preponderance of red state welfare queens).

But I went off on a parenthetical tangent. The main point is that red states, generally, getting more in federal dollars than they pay in federal taxes is not material relevant to the fiscal discipline of the states--indeed, in some case in can auger for the fiscal discipline, as some federal dollars are awarded for fiscal discipline, well-run school systems, etc. In any case, it has nothing to do with who is begging for bailouts right now, or who needs them because they are poorly managed. The states in the absolute worst shape are often blue states--Michigan, California--but not always because of liberal policies, per se. Which is what was being discussed, not the relative amount of federal dollars received by each state, which is kind of a strawman in the context of the discussion.

And, really, whining that states pay less in federal revenues than they provide in taxes is specious, anyway. So much of that is for federal mandates (don't want to send them the money? don't pass the mandate) and infrastructure (you want the Interstate to end when you hit Mississippi or Alabama, because they "don't pay enough in federal taxes"--really? The Interstate is only for residents of the state? ), or for other things, such as waste site cleanup or wetlands preservation or national parks . . . there's no national interest in taking care of those things? That's an odd position.

Just sayin'.

Posted by: Kevin_Willis | August 10, 2010 12:31 PM | Report abuse

Pssst, Mr. Klein, don't tell any one but the Feds are dong the same thing! Read the headlines:

"Defense Secretary Robert M. Gates says he will cut thousands of jobs, including a substantial chunk of its private contractors and a major military command based in Norfolk, as part of an ongoing effort to streamline operations and to stave off political pressure to slash future defense spending."

We can't keep jobs by printing more money. The govenment can't create sustainable jobs unless the economy demands it. Thus the out of control deficit. It's one big circle jerk!

Posted by: Bockscar | August 10, 2010 12:38 PM | Report abuse

eggnogfool @ August 10, 2010 11:46 AM wrote "California's constitution, for example, precludes it from being able to obtain sufficient revenue to run a state government."

Good example California, because it is actually a Conservative's dream come-true when it comes to the budget. They have managed to pass, by popular vote, mandates that require increases in spending (such as mandatory sentences) and prohibit increases in revenue (they require I believe 3/4 of a popular vote to pass) to match the spending. It is something that Shwarzenegger is trying to change, to his credit.

But California is an indicator of where the country is headed if we go by the Republican/Conservative/Tea Party positions.

Posted by: AMviennaVA | August 10, 2010 12:40 PM | Report abuse

@gregw:

Every state has problems.

We are currently discussing one set of those problems, and have the options of trying to resolve them or of making them worse.

Posted by: eggnogfool | August 10, 2010 12:46 PM | Report abuse

"@Justin84:

Problem is that the cost of an employee isn't their wage, it's their wages + benefits + other per employee overhead.

As a result, cutting salaries by 8% saves far less than 8% on labor."

Eggnogfool you're right. The problem is more than wages. In addtion to wage freezes/cuts, public employees should be required to contribute more to their pension and healthcare benefits.

My basic point is to cut compensation before employees. I think it is better to cut teacher compensation than teachers, to cut police compensation than police officers, etc. Better to lower public employee compensation than to turn roads to gravel, to have kids go to school just 4 days a week, to turn the streetlights off, etc. In a non-unionized world, you could even maintain salaries and fire the poor perforers directly, but in reality the youngest and lowest paid teachers/officers are likely to be thrown to the wolves, regardless of merit. Firing two energetic young teachers to save the annual raise of a jaded older teacher is a huge negative from multiple perspectives.

Posted by: justin84 | August 10, 2010 12:49 PM | Report abuse

When mgsorens writes: "smaller government and improving government efficiency and effectiveness, what Liberals call austerity, is the route that has been chosen by ALL the other 19 members of the G20 to heal their economies! ...That approach has already proven itself in Canada and Germany. It has also been successful in Indiana, Texas, and South Dakota. How can you say it doesn't make sense?"

Indiana: Red Welfare state sucking from the federal teat.
South Dakota: Red Welfare state sucking from the federal teat.
Texas: Does indeed pay more in federal taxes than it receives in federal money. But it also should be noted that TX safety net is worthless and weak.

"according to a new report from the National Conference of State Legislatures, out of 35 states that used federal stimulus funds to balance their budgets, Texas relied most heavily on the stimulus, using $12 billion in stimulus money to fill 96.7 percent of its budget gap.... Texas was able to balance its budget more easily than other states is because of our meager safety net, which only serves a fraction of those in need. This makes it easier for Texas to balance its budget during a recession than, say, a state like California, where the safety net reaches a greater share of people in need and therefore expands more during an economic recession when need rises. In short, it’s not hard to reduce your effort, when you weren’t making much effort to begin with."
http://shapleigh.org/owners_box/6-the-model-red-state

So, like a lot of welfare queen states that claim to have "fiscal discipline", Texas is a joke. The pain caucus relies upon people being uninformed.

To read more about Texas and its small safety net and fraud of fiscal sobriety, click here: http://shapleigh.org/owners_box/1-the-owner-s-box

Per Europe, the conservatives favorite economist Paul Krugman writes that fiscal austerity ISN'T working: "hardliners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it's true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hardliners' medicine.

It's almost as if the financial markets understand what policymakers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating. ...It is, instead, the victory of an orthodoxy that has little to do with rational analysis."
http://www.guardian.co.uk/commentisfree/2010/jun/28/21st-century-depression-greece-deficit

Posted by: gregw571 | August 10, 2010 12:56 PM | Report abuse

@Mimikatz:

I think people are aware of all of these points.

But: "States depend on income and sales taxes, which drop during a recession. Hence the shortfalls, and layoffs."

That doesn't make any sense; if you want to run a balanced budget, why would you base your revenue on income sources that fluctuate wildly? All revenue sources fluctuate, but real estate taxes are fairly stable, but were left at very low rates in some of these states,

Secondly, you point out that we just had a major recession and therefore should ignore the internal problems of these states, but in this case those internal problems, specifically dangerously low real estate tax rates, were a major source of the recession itself.

Posted by: eggnogfool | August 10, 2010 1:11 PM | Report abuse

Kevin_Willis good points all .... and taken. Just a few comments, earmarks are roughly 2% of the federal budget, so they aren't a huge factor in state - fed relationship or overall expenditures. To focus on them was not my point at all, I should have been more clear. That said, you make some strong arguments in your post.

My point is this: we're in the worst recession since the Great Depression, so any holier than thou argument that certain states are more fiscally disciplined than others should be moot a this time, we're all in this together, especially when states need the feds to provide funding and care for the least among us and the growing ranks of the unemployed. Money to states to pay for UI and to keep state employees on the job makes good economic sense. We have to avoid counter cyclical budget cutting at the state level because it'll propel us more into an economic downturn. We have to find some way to stimulate the economy and for some reason that's not being done, which is what I read to be Ezra's argument.

Per your last comment, I think you read my post the wrong way, I'm for more federal money going to the states, more money for the parks, highways, infrastructure, preserving wetlands, etc. all of it. Red stats got great parks, wetlands for hunting, killer beaches, they should be preserved protected and have adequate funding.

We need to spend more federal dollars now because inflation adjusted interest rate payments in the future make it cost effective. We need to increase aggregate demand now because Wall Street is sitting on cash reserves, still gambling on derivatives and not lending to small business. We can't cut our way to prosperity.

Posted by: gregw571 | August 10, 2010 1:19 PM | Report abuse

Ezra, you should add that the administration also has macroeconomic policy levers that its not using: the exchange rate and banking policy. On the exchange rate, a dollar devaluation sufficient to bring the exports and imports into balance (let's say that requires a 40% devaluation against the renminbi, less against other currencies) would have boosted last quarters (annualized) growth rate from 2.4% to 5%. That's exactly the kind of stimulus the economy needs. On banking policy, we have $150B left in the Treasury's TARP account. We have a program - the Public Private Investment Program - that allows joint investments of equity by private investors and Treasury to be leveraged up 6 to 1 with FDIC insured bonds in order to purchase, among other things, mortgage related instruments. We have the FHA, Fannie and Freddie with about 250K REO homes on their books, and an additional 250K+ guaranteed or insured mortgages in foreclosure. Private label securitization trusts hold another 250K of REO homes. So the Administration could buy up these homes, repair them as needed and perform investment-grade energy efficiency retrofits on them. Then is can pool them (or most of them, anyway) into rental investment trusts, greatly increasing the supply of rental housing while keeping excess housing supply from further depressing prices, generating more negative equity, etc. Just doing this for the FHA and GSEs would cost about $25 billion, and would create about 400K construction jobs (not taking into account any multiplier effect). I'm not sure how many commercial REO properties are held by banks or trusts right now, but a similar program could buy up those and perform more thorough green retrofits.

Neither of these actions would require any act of Congress, neither would (like the rumored principal reduction program) run much risk of being called a bailout, and both would have large, positive effects on output and employment. But the administration isn't doing them.

Posted by: rwclayton7 | August 10, 2010 1:20 PM | Report abuse

"They suck off the federal teat as they receive more in federal tax dollars than they pay in federal taxes"

Blue states are just spreading the wealth around to the red states. that's a good thing, right?

Posted by: NoVAHockey | August 10, 2010 1:21 PM | Report abuse

@gregw:

You are conflating different issues again.

I don't favor austerity, and I'm fine with deficit spending (from the fed), especially in recessions. Some conservatives probably disagree, but it's a different topic.

What I don't think is a good idea is making federal support of states proportional to how incompetently those states are run. It should be very evident that creates a massively perverse incentive structure.

No one at any point of the political spectrum thinks California has a functional government.

Posted by: eggnogfool | August 10, 2010 1:22 PM | Report abuse

I'm with you 100%, Ezra. Meanwhile, all I read about is how Robert Gibbs hurt people's feelings. Argggggggh.

Posted by: Justwondering14 | August 10, 2010 1:28 PM | Report abuse

Remember, America's favorite white meat is scapegoat, not chicken.

Politicians know that, and they'll serve up every last one they can find.

And because America is the Saudi Arabia of false consciousness -- world's largest producer, world's largest proven reserves -- the average American worker's response to 'My job sucks!', or 'I have no job!', will always be 'Make his job suck too!', or 'Take her job away'.

Posted by: davis_x_machina | August 10, 2010 1:30 PM | Report abuse

eggnogfool: Because only the federal government can run deficits, the feds have to help make up the slack during a recession, when both state/local government and the private sector are laying people off.

CA depends so heavily on income and sales taxes because of Proposition 13, which froze property taxes and limits increases to much, much below the level of property appreciation. Although properties are reassessed when sold, many properties still have very low taxes. It was passed in 1978 as an early salvo in the GOP shrink-government movement. When property taxes were essentially frozen, the state government came in to prevent massive layoffs of teachers, police and firefighters and other local employees. The state had to increase sales and income taxes to do this, although many communities did vote to increase property taxes to keep up services like libraries.

Another quirk of Prop 13 was to really freeze taxes on commercial proiperty, which change hands much more slowly than residential property. Most businesses lease, and it is possible to structure transactions so it looks like property never really changes hands. Commercial property isn't paying anything close to its fair share of property taxes.

Prop 13 is in the state constitution, and would take 2/3 of the voters to change. The budget also takes 2/3 of the Legislature to pass (more than to break the filibuster) and only rarely has the GOP fallen below 1/3. Hence the annual budget follies.

There are worse things than higher taxes, folks. A third-world country may have small government and low taxes, but it also has an uneducated population and poor roads and infrastructure, all of which retards commerce and industry. That's the route we are going. The generation who survived the Depression and fought WWII left us a beautiful legacy, especially here in CA. But the loss of civic spirit and private selfishness are undoing all of those accomplishments. It is sad, really, to see what self-centeredness and tribalism have wrought.

Posted by: Mimikatz | August 10, 2010 1:36 PM | Report abuse

eggnofool while I don't think I've conflated the argument, I'll take your point and I think we're in agreement when you write. "What I don't think is a good idea is making federal support of states proportional to how incompetently those states are run. It should be very evident that creates a massively perverse incentive structure."

Ezra's original post was about ways to stimulate the economy. Posts earlier argued states that show "fiscal discipline" shouldn't be burdened by states that have been run poorly. I thought that was a lousy argument sine we're all in the same boat.

We're all in this together, even red states that hate taxes, we need them to provide for their citizens. California is the 7th largest economy on the planet, we can't afford to have it go down the tubes cuz it'll have a ripple effect on our already weak national economy. I may not like the way CA runs its state government, but I can't change that. California is a basket case for a myriad of reasons, one of them being this: the state population doesn't see Sacramento covered as well as car chases. While the majority of the US population get's most of its information from local television news, the seventh largest economy in the world has a virtual television news blackout on its state government.

Major television news outlets in San Diego, LA, San Fran and other major cities throughout the state do not have reporters stationed in the state capitol. Not cost effective, state government is boring. Joe Klein joked years ago, after Arnold S got elected governor, maybe "California television news stations will cover state politics now that a Hollywood actor was governor." It never happened. Car chases get lots of coverage in Cali, state government, crickets.

Nobody likes to see state governments run poorly, but now is not the time to slash budgets and cut services. We need to stimulate the economy somehow, which I think is the point of Ezra's post.

Posted by: gregw571 | August 10, 2010 1:41 PM | Report abuse

"No one at any point of the political spectrum thinks California has a functional government." posted by eggnogfool

But yet there are many who think that the rest of us ought to throw more billions down the rathole that is the government of California without expecting that they lift so much as a finger to correct their structural problems. Not even something so simple as asking the public employees to contribute to their own benefits, for crying out loud.

The only explanation I can come up with for this insanity is that some people, (ahem), are so desperate to save Obama's rear end on the employment numbers that they will throw any amount of other people's money in that general direction and see if any of it sticks.

Posted by: bgmma50 | August 10, 2010 1:48 PM | Report abuse

@gregw571 '...now is not the time to slash budgets and cut services. We need to stimulate the economy somehow, which I think is the point of Ezra's post."

That is indeed Ezra's point. That doesn't make it right. I just pointed out that the rest of the G20, 20 large industrialized nations, disagree with Ezra and agree with what Ezra calls the Republican position.

It is also ridiculous to say that cutting spending won't work, and cutting aid to states won't work because Red States will be cut deeper than Blue states.

Posted by: mgsorens | August 10, 2010 1:52 PM | Report abuse

The fed money doesn't have to be in grants, it could be in long term (5 yrs or more) loans to get past this great recession. When the economy picks up again, the states can deal with their long term budget imbalances. In fact, the loans should be contingent on the states agreeing to revamp their revenue streams to actually meet at least their obligations to fund medicaid, schools, fire, police, etc. Getting out of this recession is not going to happen as long as we are laying off 100s of thousands of workers. Instead of saving a state that by throwing money at it, use that money as leverage to force changes that will make the states more fiscally responsible.

Posted by: srw3 | August 10, 2010 1:52 PM | Report abuse

@ mgsorens : I just pointed out that the rest of the G20, 20 large industrialized nations.

this comparison is overdrawn. Most of the G20 nations have social safety nets that are light years better than the tattered remnants we have here. So cutting employment generally doesn't mean throwing those workers into the street and increasing widespread poverty as it does here in the US. That said, the bond markets are not responding favorably to austerity as shown by Greece's and Ireland's inability to get reasonable interest rate bonds even though they have slashed spending (per Krugman.)

Posted by: srw3 | August 10, 2010 1:59 PM | Report abuse

"Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hardliners' medicine."

Greg, Ireland ran a deficit of 14.3% of GDP in 2009 per Eurostat. Spain's deficit was 11.2% of GDP. I find it difficult to accept that the cause of extra risk premium for Ireland is anticipated effects of austerity, not the more severe budget deficit. I strongly doubt that a larger deficit related to stimulus spending would have reduced the risk premium on Irish bonds.

Spain ran a stimulus of 4.5% of GDP, and is currently sitting at 19.8% unemployment from 8% several years ago. Ireland's unemployment rose from 4.5% several years ago to 13.7% today.

http://www.brookings.edu/articles/2009/03_g20_stimulus_prasad.aspx

On another note, Irish GDP grew 11.2% on an annualized basis during 2010Q1, and is fractionally down over the past year. Spanish GDP was flat during 2010Q1 and is fractionally down over the past year.

http://www.cso.ie/releasespublications/documents/economy/current/qna.pdf

http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=ESP

While Ireland is somewhat outperforming Spain, I'm not even going to necessarily make the case that austerity leads to 'better' results. At a minimum, it's hard to avoid the conclusion that global recessions resulting from a credit bubble are nasty, stimulus spending or not.

I'd be willing to bet that by 2015, Ireland will be in much better shape than Spain, measured either on unemployment, GDP growth, GDP per capita, etc.

"Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider"

Under the austerity plan, Greece is expected to have debt/GDP hit 150%, from around 120% now. That's not exactly encouraging. Many financial market participants don't think Greece will pull it off and the bailout was kicking the can down the road, and want to be paid generously for the risk of taking haircuts. I can assure you that if Greece balanced its budget for 2011, its risk spreads would fall sharply.

The lesson here is to avoid getting to the stage where markets are dictating your fiscal policy decisions - what is barely acceptable to you could be considered too little by the markets.

http://ftalphaville.ft.com/blog/2010/05/05/219811/grim-

Posted by: justin84 | August 10, 2010 2:08 PM | Report abuse

"Texas: Does indeed pay more in federal taxes than it receives in federal money. But it also should be noted that TX safety net is worthless and weak." posted by gregw571

Which accounts for our high employment rate. All ya'll Californians, don't move here unless you plan to get a job. :)

Posted by: bgmma50 | August 10, 2010 2:13 PM | Report abuse

As a general point, maybe state governments would have been in much better shape this time around had they been more fiscally responsible during 2004/2005 which were solid expansion years. State governments were in the red to the tune of $35 billion in 2005 per the chart, when unemployment was 5% - budgets shouldn't only balance at economic peaks.

Posted by: justin84 | August 10, 2010 2:14 PM | Report abuse

mgsorens "It is also ridiculous to say that cutting spending won't work, and cutting aid to states won't work because Red States will be cut deeper than Blue states."

Why is it ridiculous? When FDR spent aggressively during the Great Depression, we started to recover. We had a double dip when FDR succumbed to the whine of conservative deficit hawks and curtailed fiscal expansionary policies. History is not on the side of austerity, which is why the actions of the G20 are so confounding.

Why inflict pain if it can be avoided? Why sustain an economic downturn and make it worse, one that will ruin lives for a generation, if it can be averted? Is the objective growth?

If it's growth, how will austerity bring about economic expansion? Where will the demand come from when banks make money by sitting on 1.8 trillion dollars? Cutting state budgets is the wrong way to go. Economists call it the "paradox of thrift?" Check it out: Paradox of Thrift "Economic concept that if everyone tries to save an increasingly larger portion of his or her income, they would become poorer instead of richer. This is because the economy will slow down from reduction in demand and the very same people would lose their jobs."

http://www.businessdictionary.com/definition/paradox-of-thrift.html

If everybody tightens their belts (state governments balancing their budgets) at the same time, they offsets efforts at the federal level, our economy can't grow, thus more people are laid off, more people go on unemployment, deficits rise more, more belt tightening, rinse, repeat. It doesn't end. Austerity just brings more suffering. We need to increase aggregate demand, how will austerity by fifty states do that?

After the lost decade of George W. Bush, where middle class income didn't improve, we're about to have three more years of a perverted version of "Waiting for Godot", but in this case, we're waiting for banks to lend again. Why must we wait? As we do, deficits will continue to climb as more and more Americans will be laid off.

What is ridiculous about borrowing money when interest rates are less than 2%? We can put people to work, they will pay taxes, stay in their homes, pay rent, go shopping, accelerate the speed in which money exchanges hands in our economy. Velocity of money is a good thing. Stagnation bad.

Posted by: gregw571 | August 10, 2010 2:26 PM | Report abuse

"But that same thinking applies to state employees: No one should be for laying off hundreds of thousands of public-sector workers in a soft economy."

I see no evidence, absent a fiscal crisis of this level, that the state governments would otherwise conduct a top to bottom review of all the services that they are providing and and the number of people it takes to provide them. Or, to put it another way "a crisis is a terrible thing to waste".

As Steven Pearlstein points out:

"There is, however, a different narrative to describe the current situation that is equally defensible but leads to a very different policy prescription:

Since the last recession a decade ago, spending by state and local governments has grown faster than the economy. The percentage of the workforce employed by state and local governments rose steadily over that period, from 13.6 percent to more than 15 percent today. And during most of that same period, the compensation of government workers rose faster than that of private sector employees, particularly as a result of generous (some would say lavish) health insurance and pension benefits negotiated by their unions.

All of that seemed reasonable when skyrocketing property values, corporate profits and investment gains were swelling government coffers -- so much so that many states wound up cutting taxes. But now that the credit bubble has burst and tax revenue has plummeted, many states have significant structural deficits that will not disappear even when the economy returns to normal levels of growth and employment. Providing additional federal assistance to those states will only serve to postpone the tax increases and spending cuts that will inevitably be needed to bring budgets back into balance.

You see the box we've gotten ourselves into. To fix the economy in the long run, we have to weaken it in the short run -- yet weakening it in the short run makes it just that much harder to fix it in the long run. Any way you look at it, the economics are terrible, and the politics are even worse.

In terms of state and local governments, the reality is that they are spending significantly more than they can afford at current levels of taxation."

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/01/AR2010070106443.html

Posted by: jnc4p | August 10, 2010 2:34 PM | Report abuse

When faced with the question of whether our nation and its wonderful freedom can conintue to exist or not, we as a nation can choose to confront hardships we never thought possible before.


Obama seems to be following the plans of many 60s radicals who wished to commit the USA Taxpayer's money beyond its means in an effort to forceus on to a path of violent Communist revolution.

Cloward-Piven!

In the face of that, tax payers all across the nation are saying "screw those state workers and their overbloated Union pensions"!


God Bless America!

Posted by: FastEddieO007 | August 10, 2010 3:09 PM | Report abuse

@jnc: The percentage of the workforce employed by state and local governments rose steadily over that period, from 13.6 percent to more than 15 percent today.

That's because during the Bush years private employment didn't even keep up with population growth, so naturally public sector employment would be a higher percentage of workers. The same with wages. Private sector wages stagnated during the bush reign for everyone except for the top 5%.

This is not a particularly convincing evidence that state workers state workers are grossly overpaid. Now, compare this wage growth to the wage growth of the top 5%. That is where the money is...

Posted by: srw3 | August 10, 2010 3:18 PM | Report abuse

The irony of the "bloated pensions" is that everyone used to get a pension until the defined benefit gave way to the defined contribution. Now that the stock market is stagnant, that doesn't look like such a good deal. The fact that state and other union workers were able to hang on to what used to be a staple of middle class retirement is mostly a testament to how non-union workers have been and are constantly and massively screwed by employers.

Posted by: srw3 | August 10, 2010 3:23 PM | Report abuse

@fe007:Obama [Bush] seems to be following the plans of many 60s radicals who wished to commit the USA Taxpayer's money beyond its means

You mean Bush, who took historic surpluses and turned them into historic deficits through unfunded tax cuts, wars, and entitlements (medicare d). Who knew Bush was a 60s radical. I thought he was a 60s trust fund, partying, slacker....

I helpfully edited your post....

Posted by: srw3 | August 10, 2010 3:28 PM | Report abuse

@srw3:

Defined benefit plans from sources other than the Federal government never should have been allowed.

They've done nothing but allow executives to walk away with fat bonuses from businesses that get saddled with impossibly large liabilities, and the employees and stockholders get left holding the bag when the inevitable bankruptcy hits.

Posted by: eggnogfool | August 10, 2010 3:45 PM | Report abuse

"@jnc: The percentage of the workforce employed by state and local governments rose steadily over that period, from 13.6 percent to more than 15 percent today.

That's because during the Bush years private employment didn't even keep up with population growth, so naturally public sector employment would be a higher percentage of workers. The same with wages. Private sector wages stagnated during the bush reign for everyone except for the top 5%."

I'm not making a fairness argument, I'm making an affordability argument. One of Ezra's points justifying "temporary" help to the states is that we are experiencing a temporary surge in unemployment and suppressed tax revenues due to the recession caused by the financial crisis and that once it gets back to "normal", we can end the aid to the states. Ezra seems to use an unemployment rate of 6% as a rule of thumb for normal.

An alternative explanation is that the tech/dot.com bubble of the late 90's and early 2000's followed by the real estate/construction bubble of the mid-2000's suppressed unemployment below it's "natural rate" (NAIRU), along with producing unsustainable levels of tax revenue at the existing rates and that rather than having repeated rounds of "temporary" stimulus, we would be better served adjusting to the new reality. I.e. It may well be that the NAIRU is closer to 7% than the 5% it was during the bubbles and this leads to different policy proscriptions.

Or to put it in one sentence, the pre-2008 baseline that we are comparing unemployment and tax revenues to was inflated by the bubble(s) and we aren't going to be going back to it even after the "crisis" is over. 1993 - 1996 seems a more realistic period for comparison to me.

My proscription is a top to bottom review of the state & local budgets with the idea of eliminating non-essential items and doing agency consolidation, then increasing revenue by first eliminating things like sales tax holidays and exemptions for certain sales categories, then raising tax rates if necessary.

Posted by: jnc4p | August 10, 2010 3:46 PM | Report abuse

@ENF:They've done nothing but allow executives to walk away with fat bonuses from businesses that get saddled with impossibly large liabilities

Not true. Many rank and file employees have enjoyed defined benefit plans since WWII. The problem is corporations paid out too much in dividends and executive salaries and don't adequately fund their pension plans.

In case you haven't noticed, executives still walk away with obscene bonuses, but ordinary workers get screwed with defined contribution retirement plans that don't support them in retirement.

Posted by: srw3 | August 10, 2010 4:18 PM | Report abuse

Mimikatz, your flair for hyperbole is unmatched.

Posted by: novalifter | August 10, 2010 4:19 PM | Report abuse

No one should be for laying off hundreds of thousands of public-sector workers in a soft economy.

Actually we have a huge excess of many types of government jobs, such as teachers. There are many more teachers in the nation today than there were in 1997 based on student/teacher ratios. Start the layoffs.

A crisis is a bad thing to waste.

Posted by: krazen1211 | August 10, 2010 5:37 PM | Report abuse

"The irony of the "bloated pensions" is that everyone used to get a pension until the defined benefit gave way to the defined contribution. Now that the stock market is stagnant, that doesn't look like such a good deal."

Srw3, pension benefits also depend on the stock market - you can't get rid of the risk. Pensions are at risk of being slashed because of poor market performance (and chronic underfunding).

I'm not sure definied contribution is such a bad deal. You own it, and so you don't have to worry about anyone else screwing up your retirement.

Anyone who is retiring now/soon should have had a significant portion of their portfolio in bonds over the past decade, which would have insulated it from equity declines and it would have caught a real nice rally in treasuries. Same goes even more so for those who have been retired for awhile.

Anyone who is just starting off now has 45+ years to save for retirement - plenty of time for another bull market in equities to occur.

Those who have been working since 2000 haven't seen a whole lot of gains, but have had two nice dips where they could have bought stocks for cheap.

The only demographic that seems squeezed in my view is Gen X (specifically those around 40 give or take a few years), given that bonds are running out of room to rally and for all we know our stock market could pull a Japan - on the plus side, someone who is 40 today should have started saving around 1991 and so their total equity market return shouldn't be too awful.

I'd rather save and invest on my own than be told when I'm 58 that my company didn't adequately fund my pension and my retirement was going to be lousy. Also, defined contribution is portable whereas defined benefit often requires you to stick around with the same company for a long time in order to receive decent benefits.

A household that makes $45,000/yr and devotes 10% plus a 3% match to a 401(k) will have $708,000 after 45 years at a 4% annual return. That turns into a 30 year inflation adjusted annuity of $40,560/yr given a 6% market return and 2% inflation. If Social Security is around that's more than 100% income replacement on modest savings using a historically poor real return.

http://www.freeannuityrates.com/annuities/calculators/immediate-annuity-calculator.php

"Not true. Many rank and file employees have enjoyed defined benefit plans since WWII. The problem is corporations paid out too much in dividends and executive salaries and don't adequately fund their pension plans."

Governments also don't adequately fund their pension plans. This is the primary problem with relying on others to manage your retirement.

Posted by: justin84 | August 10, 2010 5:39 PM | Report abuse

'People, we are falling behind most of the rest of the world in education. Communities are plowing up paved roads because they can't afford the maintenance costs. Other countries, especially China, are outstripping us in green technology while people here want to return to some agrarian small-government past that died a century and a half ago.'


If kids in India are better educated for hundreds of dollars a year while kids in the United States are performing worse on tens of thousands of dollars a year, obviously our education system is performing inefficiently.

Reform it.

Posted by: krazen1211 | August 10, 2010 5:41 PM | Report abuse

"Blue states are just spreading the wealth around to the red states. that's a good thing, right?"

Yep, there's little I find more amusing than people who suggest 'taxing the rich' whine about what they created.

A better question is why blue state congressmen/legislators vote for such imbalances. I live in NJ and have asked that for years.

Posted by: krazen1211 | August 10, 2010 5:48 PM | Report abuse

It is not such a simple question because many local government have major long term financial problems. These problems come in part from committments and habits that were generated on the assumption that boom times would last forever. They also come from the fact that government employees have been more successful than the private sector in avoiding downward pressure on wages, downsizing of staff, and the elimination of defined benifit pensions. This reality is going to lead to an extended period of conflict over the fiscal problems of local governments and the priviledges of government workers. It is a good idea to help local government get through a short period of below normal tax revenues. But it is a bad idea to defer facing long term fiscal realities. Ultimately, local tax payers are going to have to decide what government services they are willing to pay for and how much taxes they are willing to pay to fund them.

Posted by: dnjake | August 10, 2010 8:53 PM | Report abuse

I understand Ezra's distress...if freely handing out tax payers money becomes less popular than having government's tighten their belts and follow a fiscally sustainable models, the Democrats whole plan to hold power completely falls apart.

The only thing that can possibly save Democrats in light of this would be if many reporters from several different "news" institutions secretly conspire to cover the news in a way that is calculated to manipulate the public into voting for Democrats regardless of what they would actually do if they were simply given the news and let them decide freely.

What do you think Ezra? Do you think you're capable of pulling something like that off?

Posted by: FastEddieO007 | August 11, 2010 7:42 AM | Report abuse

The scam with bloated Union pensions is that Union Bosses use this as their own little slush fund for all sorts of scams....then when the "investments" sour as they unsurprisingly always do, Union bosses turn the screws on their political cronies and beg for a tax payer bailout.

Yeah "bloated pensions" is mostly a testament to how non-union workers have been and are constantly and massively screwed by employers....

Nahh....its a testament of how regular people are constantly screwed by corrupt politicians and the mobsters who run the Democratic party machine.

Posted by: FastEddieO007 | August 11, 2010 7:48 AM | Report abuse

What about a world where the federal government simply decided to take less overall from its citizen's in every state allowing for states to raise their taxes locally in order to address their shortfalls?

State Aid is a BONDAGE racket----the federal government uses state aid as a means for imposing all sorts of control over how the state does its business.

States are independent totaltarian dictatorships that need federal government intervention in order to keep them moving in the right direction.

To the contrary, state governments are run with a greater and more intimate interraction from their citizens. Our society runs far more smoothly when populations solve their problems modularly at the local level with less one-size-fits-all regulation imposed from Ivory Towers in Washington DC!

POWER TO THE PEOPLE!!!

Posted by: FastEddieO007 | August 11, 2010 8:36 AM | Report abuse

Just because we could stop it does not mean there are no implications for doing so, and they are generally negative economically in the long-term. However, I wouldn't put this past simple political manipulation by the Republicans.

Posted by: EconomyInCrisis | August 11, 2010 12:52 PM | Report abuse

FastEddie, you're absolutely right. The abuse of federal power though is nothing old. It would take a renaissance/revolution to put the power back in the hands of the states/people/constitution.

Posted by: EconomyInCrisis | August 11, 2010 12:57 PM | Report abuse

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