MassBudget recently published a short paper that may be of interest to BMG readers. Economic Stimulus: What Can National and State Governments Do To Save and Create Jobs Quickly?, examines how economic stimulus policies work and which levels of government have the strongest capacity to create jobs and stimulate the economy quickly.
The paper examines how, during an economic downturn, governments can increase economic activity and overall employment through direct spending and tax cuts. This is a strategy that can be pursued by the national government, but not by state governments — because state balanced-budget requirements make it impossible to increase spending and reduce taxes in a recession. In fact, during recessions states generally have to enact tax increases and spending cuts that reduce economic activity. Fiscal relief from the federal government is one of the few strategies that can help states to avoid taking actions that will harm the local and national economies. Economists have found that this state fiscal relief is among the most effective things that the national government can do to save and create jobs.
Recognizing the effectiveness of state fiscal relief for job creation and retention — and the long-term economic and human damage of deep state budget cuts to education, health care, and other basic public services — the U.S. House and Senate each voted earlier this year to extend the largest portion of state fiscal relief in the federal stimulus law for an additional six months (the aid is in the form of increased federal reimbursements for Medicaid spending, known as FMAP). Massachusetts and 29 other states have used that expected revenue in their budgets to avoid additional tax increases or spending cuts. While that extension has passed each house of Congress in separate bills, it has yet to be included in a single piece of legislation that has been approved by the both the House and Senate — and there is significant concern that it may not be.
If Congress fails to approve the six-month FMAP extension, Massachusetts would be forced to cut its budget, raise taxes, or deplete reserves that will be needed next year by a total of $600 million to $700 million. Nationally states would lose over $20 billion — which would force spending cuts and tax increases that would weaken the national economy and reduce employment at a very precarious point in our economic recovery.
At the state level, the requirement to produce balanced budgets — which means paying for tax cuts with tax increases or spending cuts, and paying for spending increases with other spending cuts or tax increases — means that states cannot undertake classic stimulus strategies. States can make investments to improve long-term productivity so that they can outperform other states at each phase of an economic cycle, but there is very little they can do to affect economic cycles. The report examines how states can best pursue economic stimulus policies given the constraints they face.
The report is written by Noah Berger, President of the Massachusetts Budget and Policy Center, and Robert Tannenwald, a Senior Fellow at the Center on Budget and Policy Priorities’ State Fiscal Project.
The full report, “Economic Stimulus: What Can National and State Governments Do To Save and Create Jobs Quickly?,” is available here.
