Because of the crisis, state and local governments are facing falling tax revenues, increased demand for social services, and high credit costs. These factors, along with balanced budget rules, are forcing cutbacks at the state and local level at a time when just the opposite is needed:
Fifty Herbert Hoovers, by Paul Krugman, Commentary, NY Times: ...[A]s Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future. ...
Now, state governors aren’t stupid (not all of them, anyway). They’re cutting back because they have to... But ... contemplate just how crazy it is ... to be cutting public services and public investment right now.
Think about it: is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago? Of course not. Our capacity hasn’t been diminished; our workers haven’t lost their skills; our technological know-how is intact. Why can’t we keep doing good things?
It’s true that the economy is currently shrinking. But that’s the result of a slump in private spending. It makes no sense to add to the problem by cutting public spending, too.
In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.
And shredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.
So why are we doing this to ourselves?
The answer, of course, is that state and local government revenues are plunging along with the economy — and ... lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments ... are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt...
Are governors responsible for their own predicament? To some extent. Arnold Schwarzenegger, in particular, deserves some jeers. ... But even the best-run states are in deep trouble. Anyway, we shouldn’t punish our fellow citizens and our economy to spite a few local politicians.
What can be done? Ted Strickland, the governor of Ohio, is pushing for federal aid ... on three fronts: help for the neediest, in the form of funding for food stamps and Medicaid; federal funding of state- and local-level infrastructure projects; and federal aid to education. That sounds right...
And once the crisis is behind us, we should rethink the way we pay for key public services.
As a nation, we don’t believe that our fellow citizens should go without essential health care. Why, then, does a large share of funding for Medicaid come from state governments, which are forced to cut the program precisely when it’s needed most?
An educated population is a national resource. Why, then, is basic education mainly paid for by local governments, which are forced to neglect the next generation every time the economy hits a rough patch?
And why should investments in infrastructure, which will serve the nation for decades, be at the mercy of short-run fluctuations in local budgets?
That’s for later. The priority right now is to fight off the attack of the 50 Herbert Hoovers, and make sure that the fiscal problems of the states don’t make the economic crisis even worse.