Republicans still don't get the point of the stimulus

The Republican Party opposed President Obama’s economic stimulus bill earlier this year, instead advocating a federal spending freeze in response to the recession. The misguided Republican proposal would have repeated Herbert Hoover’s big mistake, ignoring consensus among economists that deficits help end recessions.

The stimulus bill wasn’t perfect, but it contained some valuable provisions, notably aid to state governments, which can’t run deficits. While Governor Chet Culver imposed two rounds of cuts to fiscal year 2009 spending, federal stimulus funds helped lessen the severity of those cuts and avoid drastic reductions in the 2010 budget.

That’s good, because state budget cuts can further weaken an already weak economy, as the Center on Budget and Policy Priorities explained in this review of state fiscal stress across the country:

When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy. […]

Federal assistance can lessen the extent to which states take pro-cyclical actions that can further harm the economy. The American Recovery and Reinvestment Act recognizes this fact and includes substantial assistance for states. The amount of funding that will go to states to help them maintain current activities is approximately $135 billion to $140 billion – or about 40 percent of projected state deficits. Most of this money is in the form of increased Medicaid funding and a “Fiscal Stabilization Fund.” This funding will reduce the depth of state budget cuts and moderate state tax and fee increases.

Leave it to the Republicans to miss the point of stimulus aid to state governments, as I’ll discuss after the jump.

After Culver defended his handling of state finances during a May 29 appearance on Iowa Public Television, Iowa GOP chairman Matt Strawn fired back:

Responding to Governor Culver’s comments taking credit for a balanced 2009 budget: “It is only because of the federal stimulus bailout, not any spending discipline on the Governor’s part, that he can claim a balanced budget. All Gov. Culver did was temporarily pay off the state credit card by transferring the balance to the federal credit card.”

Similarly, Krusty Konservative wrote last week,

Culver also used the majority of the federal stimulus money to back fill his budget. That means all it really did was prevent the state of Iowa from cutting employees. So while big government stays fat and happy, the private sector worker is screwed.

Strawn and Krusty couldn’t be more wrong about this issue. Mark Zandi, chief economist for Moody’s, explained why federal transfers to state governments are a “potent tool” for stimulating the economy (pdf file):

Because most state constitutions require their governments to eliminate deficits quickly, most have drawn down their reserve funds and have already begun to cut programs from healthcare to education. Cuts in state and local government outlays are sure to be a substantial drag on the economy in 2009 and 2010.

Additional federal aid to state governments will fund existing payrolls and programs, providing a relatively quick boost. States that receive checks from the federal government will quickly pass the money to workers, vendors and program beneficiaries.

Arguments that state governments should be forced to cut spending because they have grown bloated and irresponsible are strained, at best. State government spending and employment are no larger today as a share of total economic activity and employment than they were three decades ago.

In fact, Zandi found that federal aid to state governments has a much larger economic stimulus “bang for the buck” than various tax cut proposals cherished by Republicans.

I get that some Republicans relish the prospect of making deep cuts in state spending, but during an recession, the private sector is already suffering from widespread belt-tightening by individuals and businesses. Adding large state budget cuts to this situation perpetuates a vicious cycle.

Incidentally, the Center on Budget and Policy Priorities found that at least 47 of the 50 states had budget shortfalls in fiscal year 2009; a chart on this page shows that Iowa’s budget gap was comparatively small as a percentage of total spending. Also, most states have drawn down their “rainy day funds.” Fortunately, Iowa does not find itself in that position.

Further cuts to Iowa’s 2010 budget may be needed, depending on final tax receipts. But in a precarious economy, it’s prudent for state legislators and the governor not to make deeper spending cuts than are absolutely necessary. Iowa’s leaders used the federal stimulus money wisely.

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