Economics 101 for Christian Fong

For a guy who wrote a short book’s worth of blog posts as “The Armchair Economist,” Republican gubernatorial candidate Christian Fong has been saying some boneheaded things about the state budget lately.

Fong was among five potential gubernatorial candidates who braved the rain on Saturday to speak at the Dallas County GOP Family Picnic. After pledging to implement the usual Republican wish list (income tax cut, constitutional amendment banning same-sex marriage), Fong made this promise:

“I know, as a business owner and as a businessman, that Iowa’s core values say we have to have fiscal responsibility in the Statehouse,” Fong said. “As governor I would balance the budget every year … without raiding the reserves.”

Mr. Armchair Economist, reserve funds are known as “rainy day funds” for a reason. States build them up in good years so that they won’t need to sharply cut spending during an economic downturn (when tax revenues fall and demand for social services rises). In December 2007 the U.S. entered the most severe economic recession this country has seen in two and a half decades. In fact, we’re in the longest U.S. recession since World War II. That’s exactly the time for states to dip into reserve funds.

Speaking of rainy-day funds, a Cedar Rapids flood recovery leader like Fong might remember that it rained a lot in Iowa last year. Fong’s already on record opposing the I-JOBS infrastructure bonding program, which has allocated $45 million in flood recovery funds to Linn County alone. Now he’s saying he wouldn’t have dipped into reserve funds to support flood relief either, despite collapsing tax revenues due to the national recession.

Fong stands with other Herbert Hoover-like Iowa Republicans, who think deeper spending cuts are just what the doctor ordered during a recession. For example, Fong asked his Twitter followers a rhetorical question: “Any family getting through recession by spending more, like state govt?”

Whether or not Republicans are willing to admit it, Governor Chet Culver imposed two rounds of cuts to fiscal year 2009 spending. True, federal stimulus funds helped lessen the severity of those cuts and avoid drastic reductions in the 2010 budget–which was a critical part of the stimulus bill (see here and here).

I’ll let Mark Zandi, chief economist for Moody’s, explain 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.

I couldn’t find anything Fong wrote for the Hawkeye Review blog specifically about the federal stimulus bill, so I don’t know whether he agreed with Republicans who advocated a federal spending freeze instead. You don’t need formal economics training to understand how bad that idea was. Josh Marshall put it well:

When the crisis is a rapid and catastrophic drop off in demand, you handcuff the one force that can create demand (i.e., the federal government) in the throes of the contraction. That’s insane. Levels of stimulus are a decent question. Intensifying the contraction is just insane and frankly a joke.

In my book, promising not to touch state reserve funds during a recession is just as insane.

I hope Fong’s comments about the budget are cynical pandering to the Republican base. It’s more scary to think that the brainiest Republican candidate actually believes this stuff.

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