Economic policy is full of challenging decisions where the right answer is unclear. It is fortunate, then, that the tragedy of our current economic conditions makes one policy response very clear: We must help state and local governments maintain the spending they had planned a year ago.
Right now almost all of the state governors are cutting spending and/or raising taxes in an effort to close their state budget gaps. The result of these dozens of little Hoovers — and of the hundreds of mayors who are following similar policies — is predictable and disastrous. Just when the economy needs more jobs, state and local governments are cutting them. Just when the federal government is putting tax cuts in the pockets of consumers to spend, state and local governments are reaching into those same pockets and extracting spending power.
The federal budget deficit will be a very large problem in a few years. Right now, though, the problem is that the deficit is not large enough. For this year and next, the federal government should be borrowing even more to help states and local governments maintain their spending without raising taxes.
There was some efforts in this direction in the Obama administration’s first stimulus package – but not enough. The economy needs the Administration’s next stimulus package to grow these transfers by many billions – and for that next stimulus package to be enacted very soon.