It's always such a shame to read about local governments cutting spending and raising taxes to make ends meet in the midst of an economic downturn. This sort of thing only does further harm to the economy. What you ought to have is a situation where surpluses are built-up during the fat years and spent-down during the lean ones. Obviously you can see why practical politicians in the real world don't behave that way, but states could presumably adopt rules requiring local governments to do that.
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The Cycle
19 Mar 2008 11:13 am
Comments (26)
With whose money? Whether local or state, it's the same voters who don't want to see their property taxes rise even faster than they already are. And many states are already passing on significant unfunded mandates to the locals.
it is also why politicians don't fund a maintenance trust when they build a new road, not to mention pension funding and civil service union bargaining -- they require long-term thinking and it is unpopular to suggest holding off new spending to actually fix/replace infrastructure and/or prepare for an entirely foreseeable tax revenue cycle.
see also MY's favorite: public transportation planning.
some states do have rainy day funds, but they are generally sized for a drizzle and not a downpour.
which points to the problem: given the way in which taxes are demonized at every turn, the idea that "i should pay more taxes now because someday the economy will turn south again and better to have a reserve than to slash services" is not a winning one in american politics.
Also - whenever we're in a boom, that boom proves that the laws of economics have changed and that we're never going to have an economic downturn ever again, so of course it would be silly to save money for a rainy day - in fact, such an idea would be contrary to the very laws of economics, which have been transformed by whatever unsustainable bubble is powering the economy at that moment.
I wish someone would run for president during a time of surplus and talk about this.
You know, the "lockbox" concept.
But not if that guy is "stiff" or "wooden." We can't have that in a president.
Actually, many states do have a rule for this purpose, requiring a rainy day fund (some percentage of the total budget) to be maintained for counter cyclical purposes. Of course these funds are often raided (often for actual rainy days--hurricane recovery) but the principle is a good one.
Didn't Joseph tell the Pharoah to store up grain during the fat years so that there'd be food in reserve for the lean years?
WinSmith, I think you've hit on what our politicians have been missing: an Amazing Technicolor Dreamcoat.
I used to work in the budget office of the Arizona legislature. My boss was the architect of the state's rainy day fund, and the chairs of the appropriations committees in both houses were old-school conservatives (opposed to spending, not just taxes) who supported it. Unfortunately, the governor was a "supply-sider" who saw the rainy day fund as "dead money", and he thought that Arizona was such a uniquely wonderful place that we would just keep booming forever. A lot of legislators agreed with him.
Of course, the rainy day fund was cut, and when the predictable downturn came, there was a big hole in the state budget.
Often the federal government would have helped in situations like this in the past, by giving more money to state and local governments, because the federal government can run a deficit more easily. Two guesses why that's not happening now.
CBPP has a great primer on "Four Helpful Hints for States Dealing With Deficits." Most of their advice would apply to municipalities, as well.
Here's the short report: http://www.cbpp.org/policy-points3-12-08.htm
Another reason why Guiliani was a lousy mayor, didn't build up a surplus when he could. Counter-cyclical policies are really ideal for relatively small entities like cities.
which points to the problem: given the way in which taxes are demonized at every turn, the idea that "i should pay more taxes now because someday the economy will turn south again and better to have a reserve than to slash services" is not a winning one in american politics.
Posted by howard | March 19, 2008 11:29 AM
Well, it hasn't been, but that doesn't mean it couldn't be.
One thing that exacerbated current budget shortfall problems was the tax rebates sent out back in the late 1990s. The rebates were based on the idea that a tax surplus represents overtaxation. A skilled politician or party could easily shoot down that notion and in its place introduce ideas like prudence and long-term planning. I think people have that history very much in mind, so I think there's an opportunity going forward to re-orient the debate when the economy gets roaring again.
Matt's point confuses me: the same practical realities that govern local politics also govern state politics, which means state politicians may mandate spending to local governments, but almost never mandate taxes.
The 'rainy-day' fund strategy doesn't work for policies that require new investment. An example in the DC area is the revival of downtown Silver Spring-- Doug Duncan, MoCo county executive at the time, understood that Silver Spring's revival could only happen while the economy was having fun, rather than at the morning after.
On the other hand, maybe there is a lot of voter/taxpayer mistrust that the rainy day fund will be misused/misappropriated by their legislators. It is a rational response to starve the government beast and require legislators to actually ask for the money after they've played their financial shell-game.
The mistrust wasn't created in only one cycle or on only one political party's watch. And it doesn't make government any more efficient. But if fits very nicely on a bumper sticker.
Brad DeLong learned his lesson about building surpluses years ago. Republicans will just steal them.
I don't know what his solution is, but mine is for Democrats to be Democrats. Tax & spend, tax & spend.
Higher taxes do not hurt an economy.
Wise Democrats tried to include interim support for state programs to prevent the raising of taxes by states and to maintain services during the recession. Republicans killed it, as I recall, though I don't remember which crackpot "theory" they were relying on at the time.
(Almost slipped, first writing "depression" for "recession." Hmmm.)
I was under the impression that state governments cannot defecit spend. Unlike the federal government, they must balance their books every year. Was I misinformed?
freddiemac, i think there is one state where it is a state constitutional requirement that the budget balance (can't recall which), but that's exactly why state spending is cyclical: it must track tax receipts (unless there is a federal, countercyclical infusion).
When economic times are tough, cut taxes to stimulate the economy.
When economic times are good, cut taxes to maintain economic growth.
Hooray for deficits!
States can't run a deficit because they don't issue their own currency. That's the only reason the federal government is able to issue so much debt, because of the whole concept of being "Backed by the full faith and credit of the almighty US government." One day, when the global consensus catches up to reality and the US is no longer invincible, our debts will be called in and today's devaluation of the dollar will look generous.
Freddiemac -- Maryland cannot deficit spend, nor can its jurisdictions. I think this is the case in most states, at least with respect to the state government. Worse, though for Prince George's County, one of the DC suburbs examined in the linked article, they are forbidden by County charter from raising property taxes above $0.96 per $100 of value.
This is actually much more serious than the article lets on. There is little localities can do about sales taxes. Income taxes can be raised, but it pisses people off and doesn't add revenue in a downturn. If you raise property taxes, the value of the houses go down thus reducing the tax base. In a period where retail sales, incomes and property values are all trending down, this is a nightmare for localities. And laying off government workers just adds to the misery.
Deficit spending, tax cuts, if PG could declare war on the district, maybe we'd be OK. Just like Bush's America and I'd like to get the Bullets back.
Tax limitations law and constitutional amendments like the TABOR (Tax Payers Bill of Rights)in Colorado and Prop. 13 in California have devastated local governments. In Colorado, this law is statewide and state and local government cannot legally save their surpluses. They must be rebated. Also, the insidious nature of the law is such that the actual tax rate ratchets downwards which caused such things as devastating fire spreads in California as a result of the decimation of their fire departments. In Colorado, this has had the effect of tripling the cost of a Colorado college education over the last ten years since the state has no funds to support higher education. (The Republican president of the Colorado Senate chortled that he would see the end of state support for higher education.) Surpluses would be wonderful, but we can't build them up any more.
Again... these tax limitation amendments were put into place as RESPONSES to ill-considered legislative policies. For most, the problem isn't the marginal additional tax, per se, but the use of built up rainy day funds, particularly when they aren't being used for their stated purpose. Invariably, legislatures have been unable to prevent themselves from turning them into slush funds.
Radical Keynesianism!
But...correct.
Luckily, here in Washington State we have a Democratic governor and Democratically controlled legislature, who put away a billion dollars in a rainy-day fund last year.
Thank god we didn't have red-ink Republicans running the place...
Comments closed April 02, 2008.
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Heads in the Sand
Ideally, means-tested social programs can have this effect. When people are experiencing economic hardship, more people are eligible for aid, and spending is increased. When people are doing better, fewer people are eligible for these programs and spending is reduced. The best part is that the process is automatic; nobody needs to determine whether we're in a recession or not, no legislature needs to pass a stimulus. It just happens automatically.
Posted by Zeke | March 19, 2008 11:26 AM