Breaking even against 50 Hoovers

BREAKING EVEN AGAINST 50 HOOVERS…. A year ago, with the economy in freefall and facing a deflationary spiral, the last thing we wanted the government to do is respond with spending cuts and tax increases. But that’s exactly what happened in every state in the country — because states have to balance their budgets.

And as Ezra Klein explained today, it created a dynamic that made growth that much more difficult — just as the federal government was boosting the economy with an effective stimulus strategy, states were undercutting the economy with an anti-stimulus strategy.

A multiple choice question for you: Did the stimulus a) work; b) fail; c) end up locked in an unexpected battle with the massive anti-stimulus that’s ripped through the states?

Most people would choose “a” or “b” (though I’d say “a” has the better of it). They probably haven’t heard of “c.” But ask Bruce Bartlett, a conservative economist who worked for Ronald Reagan, George H.W. Bush and Jack Kemp, and you’ll hear all about it. “When the history of the current crisis is written, much of the blame will be placed on the sharp fiscal contraction of state and local governments,” he says. “I think economists will view this as a preventable error equivalent to the Fed’s passive shrinkage of the money supply in the early 1930s.” […]

Some 46 states are facing budget gaps that will require them to cut spending or raise taxes. The Center on Budget and Policy Priorities estimates that in 2011, the states will have to come up with a total of $180 billion.

These budget shortfalls are the equivalent of a massive anti-stimulus, which some experts believe has overwhelmed the $787 billion stimulus passed by the federal government in 2009.

All told, the federal stimulus did exactly what it was supposed to do, but its sum total was overwhelmed by even larger anti-stimulus at the state level. Nick Johnson, who directs the State Fiscal Project at CBPP, told Ezra that “the effect of the federal stimulus was to wipe out the negative effect of the state contraction.”

The Recovery Act, then, has struggled to break even. Worse, it’s not over — states are still cutting, and are prepared to approve massive layoffs of teachers, police officers, and firefighters. Congress could intervene to prevent it — President Obama has urged lawmakers to save those jobs — but Senate Republicans won’t let the aid come up for a vote.

It’s also worth remembering that the original federal stimulus, as written last year, included extensive aid to the states — not enough to prevent cuts, but money to help soften the blow. When the Republican “moderates” demanded a compromise, they not only slashed $100 billion from the overall package, they also specifically demanded $40 billion intended to help state budgets be eliminated. Dems had no choice but to go along, since it was the only way to overcome the GOP filibuster.

At the time, some of us screamed about how misguided the Republican demands were. With the benefit of hindsight, it’s even more obvious how right we were, and how wrong Susan Collins and Olympia Snowe were.

That Republicans will be rewarded in November for getting the crisis backwards seems especially tragic.