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   I certainly hope you all had a wonderful Fourth of July recess, and enjoyed the long summer holiday with your family, friends, and wealthy campaign contributors.

    If I might, though, I'd like to raise something else.  You see, while you were enjoying the financial perquisites of power last week, a couple of other things happened:  first, the long-term unemployed ran out of benefits.  I'm not sure what you expect them and their children to do.  Maybe roll up under a bridge somewhere out of sight and die?   I'm not sure.

The second thing is, most states started a new fiscal year. And since the states, unlike you, have balanced budget requirements, and so can't just decide to print money, and many have gotten to the point where they just can't issue new bonds that will be soaked up by willing foreign backers, that means they have to cut.  Severely.  I gather you don't want to give them any more relief because of concerns about the National Debt.

If that's what you're bound and determined to do, I have a  proposal for you:  ***LOAN*** them the money.

State revenues collapsed by20% or more in this recession, and while you helped them out last year, this year you've refused and so they are feeling the full brunt of that fall-off in revenue.

Like I already said, that means they have to make some horrific budget cuts.  We're talking libraries and summer swimming pools and teachers and road maintenance and even fire stations and police.  The estimates of jobs that will be lost in the next 12 months as a result are all over the place, but all of them are in the six-figures.

I'm sure you'll agree -- well, I certainly hope you'll agree -- that sustaining several hundred thousand new job losses is the last thing that the still-fragile recovery needs to see.  Back when you passed the economic stimulus plan in the first months of Obama's term, you may remember hearing testimony about a "multiplier effect."  You put a lot of money into the system, and built a lot of new roads and made other improvements, and that money doesn't stop there, it suffuses throughout the community, creating new demand wherever it goes.  Well, I hate to tell you but the reverse happens too.  When you drain money out of the system, that too suffuses throughout the community, destroying demand.  That isn't good.  That's what all this talk of a "double-dip" is all about, and having that kind of talk in the months right before voters decide whether or not to rehire you for the next term is probably the last thing you want.

I understand, you are reluctant to just gift the states with cash.  You've awakened after 10 years and discovered that we are running some tremendous budget deficits.  You've also noticed, again after a 10 year hiatus, I'm not sure what that was all about, that the National Debt of $13 Trillion and counting is a long-term structural problem and must be dealt with sometime soon.  So, you've decided that the cupboard isn't exactly bare, but it's looking a little sparse, and you have refused to give the states any more money.

OK.  I may not agree, but I understand where you are coming from.  But what if I told you that you could help the states, you could save hundreds of thousands of jobs, and it wouldn't add a single penny to the National Debt?  Would you be interested in that?  Do I have your attention?  Because it's true.

Ladies and Gentlemen of the Congress:  ***LOAN*** the states the money.  Don't give away a single dime.  For example, if New York State was going to be given $5 billion, change it over to a $5 billion loan, and get it out the door now.  New York gets the money immediately, doesn't have to close libraries or swimming pools or fire teachers or maintenance crews or firemen or police, it can continue to repair its infrastructure, and the United States of America will get the money back.

How should the loan work?  Well, you can always K.I.S.S.  You can simply require that after one or two years, the money must be paid back in quarterly installments over the next five years thereafter.  Hopefully after a year or two, the states' balance sheets are fully repaired, and they will be paying the funds back during an economic expansion, when they can afford the cost in the budget.  If you want to make it slightly more palatable, you can put in the proviso that the funds will be paid back on a schedule of 20 quarters - five years - for each quarter that (1) the GDP is growing; and (2) the GDP is higher than GDP has been in the 2nd quarter of 2010.  That way you guarantee that states only have to pay back the money during an economic expansion, when their budgets can best take the hit.

You can charge interest too.  The interest should accumulate at the same rate as inflation.  That way you aren't getting paid back with inflated dollars, but real hard currency.

And it's as close to a sure thing as could be, that the Federal government will be paid back every penny.  The Rockefeller Institute, that keeps track of state finances, estimated that the states' revenues bottomed out in the first quarter.  While they also say that income taxes paid in April 2010 for 2009 income probably came in light (which is understandable), incoming state sales tax revenues have been improving too.  Here's the situation in May 2010 from 11 of them, including the biggest.  Only one of them hasn't seen growth.  And I can tell you that month after month, the comparisons have been getting better:

New York State: up 7.8%     Indiana up 5.5%     Texas up 1.5%     Tennessee up 3.7%     Alabama up 2.1%     Georgia up 9.0%     California up 13%     Florida up 6.0%     Pennsylvania up 7.5%     Ohio up 5.5%

Of all the states I was able to check, only New Jersey reported a decrease in YoY sales tax revenues, down  -3.3%.

So, here's what you are going to be able to tell the voters of your state, just before you stand for re-election:  You rode to their rescue.  Your state is getting $billions to avoid layoffs and shutdowns.  And in the process of doing so, not a single dime will be added to the long-term National Debt.  The ultimate beauty of it is, it is what economists' call "counter-cyclical".  You spend during recessions and save during expansions.  That's how Keynesian economics is supposed to work, and that's exactly what you are doing.  Not just left wing economists like Krugman, but even right wing economists from the American Enterprize Institute who agree that we've got to continue stimulating the economy now, will support you.

It appears, by the way, that I am not the only one floating this idea. Last Thursday in the New York Times, Berkeley Law School Dean Christopher Edley Jr., who was a Clinton White House official, wrote that

the failure to recognize the states as macroeconomic players [ ] helps explain our sluggish recovery.

[S]tates are managing huge budget crises with the only tools they have, cutting spending and raising taxes — both of which undermine the federal stimulus.

[ T]he best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.

Here’s how this would work.... Congress should pass legislation that would allow a state to simply get an "advance" on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

....

What would this cost the federal government? Nothing. There would be zero risk of default, and a guarantee of full repayment plus interest equal to what Treasury pays in the bond markets to borrow. Congress would need only to appropriate the administrative costs of this program, which would be minimal.

Edley's piece was widely seen as a "trial balloon."  I strongly recommend that you endorse it.  or would you rather face hostile questioning from your constituents at home in October about all the cutbacks in state and municipal services?

And while you are at it, you might want to think about the unemployed.  If you are bound and determined not to directly create jobs in another WPA style program, and bound and determined not to give out any more extended unemployment benefits, you could at very least turn extended unemployment benefits into a loan that has to be paid back in full over time once they get a job and the economy is growing.  Some states do that with welfare benefits: it's called a welfare lien.  It isn't what I'd prefer, but it's better than the alternative of asking them and their children to please go somewhere where you can't see them and die.

   Peace and love,  New Deal democrat

Originally posted to New Deal democrat on Mon Jul 12, 2010 at 05:54 AM PDT.

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Comment Preferences

  •  This may be the best available alternative (35+ / 0-)

    given Congress' deficit-peacockery.

    Heck, it may be the best idea, period.

    As always, mojo and/or recommendations are gratefully appreciated.

    "When the going gets tough, the tough get 'too big to fail'."

    by New Deal democrat on Mon Jul 12, 2010 at 05:42:53 AM PDT

  •  Excellent idea. (9+ / 0-)

    Jamie Galbraith also had a good article today in TNR (I know, I know).  Some teaser excerpts:

    Upon taking office, President Obama had a chance to change course and didn't take it. By seizing the largest problem banks, the government could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks' lobbying power and therefore their capacity to obstruct financial reform. The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened.

    None of this happened. Instead the Treasury administered fake "stress tests" and relaxed mark-to-market accounting rules for toxic assets which permitted the banks to defer losses and to continue to carry trash on their books at inflated values. This reassured the banks that they would not be permitted to fail—and so back to bonuses-as-usual they went. The banks survived, and the administration today claims this "proves" they didn’t need to be taken over. But to what end did they survive? The banks are bigger, more powerful, and moer obstructionist than ever—and largely uninterested in making new commercial, industrial, or residential loans.

    Today the former middle class is largely ruined: upside down on its mortgages and unable to add to its debts. With housing prices low and falling, banks are delaying foreclosures because they don't wish to recognize their losses; it is a sick fact that the cash homeowners conserve by non-payment is one source of the anemic recovery so far. But construction remains depressed, state and local budgets continue in a death-spiral of spending cuts and tax increases, the stimulus will soon end, and exports may soon fall victim to international austerity and the rapidly declining euro. Meanwhile the deficit hysterics seem determined to block unemployment insurance and aid to states today, and to cut Social Security and Medicare tomorrow.

    What to do? To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations—Representative Marcy Kaptur has proposed adding a thousand FBI agents to this task. It means criminal referrals from the Financial Crisis Inquiry Commission, from the regulators, from Congress, and from the new management of troubled banks as they clean house. It means indictments, prosecutions, convictions, and imprisonments. The model must be the clean-up of the Savings and Loans, less than 20 years ago, when a thousand industry insiders went to prison. Bankers must be made to feel the power of the law in their bones.

    Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. - JM Keynes

    by goinsouth on Mon Jul 12, 2010 at 06:01:06 AM PDT

    •  I like Galbraith, (2+ / 0-)
      Recommended by:
      TracieLynn, goinsouth

      I read The Predator State and got much out of it, especially this:

      The Twin Deficits - As an accounting issue, the Federal deficit cannot be balanced, absent massive private sector borrowing, in the face of a foreign trade deficit. The equation is this: Trade Deficit = Federal Deficit + Private Sector Debt

      Balancing the budget is a Fool's Errand.  

  •  I like it. (4+ / 0-)

    Working in higher ed I can tell you that if we take too many more hits we fear the damage could be irreparable in the short to mid term.

    The Ongoing Drama of Palin's Place - for your latest in faux outrage and professional victomhood.

    by delmardougster on Mon Jul 12, 2010 at 06:07:27 AM PDT

  •  If a state should default, however, (6+ / 0-)

    what would the remedies be as a practical matter?  Would the federal government actually sue and execute on the assets belonging to the state? Offset future state grants or projects?  The states that have been balancing budgets all along would assume that the money's never coming back and that profligacy is being rewarded.

    Someone on daily kos called me a poopyhead. My life is SO like Nelson Mandela's.

    by Inland on Mon Jul 12, 2010 at 06:08:29 AM PDT

  •  But only to those states with a plan. (3+ / 0-)

    If the loans are too easy, maybe a lot of states would opt for them without dealing with a long-term plan that would bring them back to financial health.

  •  I like the idea, but I see a problem. (4+ / 0-)

    Congress should pass legislation that would allow....

    .

    Based on Congress' current performance, this seems like wishful thinking.

  •  Another form of this (9+ / 0-)

    was suggested by Katrina Vandenhueval at the Nation. I have heard it floated another place too (can't remember where)  She said the Fed should open the Discount Borrowing window to States at the same rate as Banks pay - 0 to .25%
    Why should the Banks have access to cheap money when the states don't?  They pay for borrowing on the open market. Historically municipalities have gotten lower rates than corporate America but that is changing as States have budget shortfalls. Their rates are increasing.

    An example: California wants to issue Bonds for a Water project. (not likely with the state Broke) The cost is expected to be $85 billion.  The Interest cost alone on the open market is another $10 billion.  What if they got that loan from the Fed at 0%?  The principle of a Bond is typically paid off at the end of 10, 20 or 30 years but the interest payment is a due the first year and every year after that.

    States raise money through the purchase of Revenue Bonds all the time.  Sometimes they ask (or not) the taxpayer to accept a new mil levy to pay for a project such as the CA Water Project.  With some states, like CA and CO, unable to raise taxes without major gymnastics they are not funding new projects.  They aren't building schools, roads, or water projects and of course the jobs that go along with these are not happening either.

    The beauty of this is that the Fed does not need to ask the Congress to do this.  They can do it all on their own initiative.  Not that I agree they should have this power, but hey, you work with what you've got.

    Loyalty to petrified opinion never yet broke a chain or freed a human soul in this world--and never will. Mark Twain

    by whoknu on Mon Jul 12, 2010 at 06:17:31 AM PDT

  •  how on earth do you get out of debt (0+ / 0-)

    with more debt.yeah let DC pay the bill grat idea may i ask with wich money.

    •  Oh, Christ on a bike. (4+ / 0-)

      The same way you can get out of cardiac arrest caused by electricity with jumper cables.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Mon Jul 12, 2010 at 06:21:43 AM PDT

      [ Parent ]

      •  This quip has been brought to you by the "People (0+ / 0-)

        Who Spout Talking Points Should Have Their Voting Rights Revoked" society.

        Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

        by Dauphin on Mon Jul 12, 2010 at 06:25:11 AM PDT

        [ Parent ]

    •  And money is a funny thing. (2+ / 0-)
      Recommended by:
      TracieLynn, New Deal democrat

      You can print as much as you wish. You can inject as much of it as you wish into the economy. As long as we're in a liquidity trap and there is insufficient demand it won't result in inflation, and neither will debt, as the interest rate shifts on governmental bonds have proven quite clearly.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Mon Jul 12, 2010 at 06:23:28 AM PDT

      [ Parent ]

    •  More money for education (3+ / 0-)
      Recommended by:
      New Deal democrat, Dauphin, Azazello

      Sounds like it would have helped you whenever you were learning how to write...

      Help build the Progressive Governing Majority at Open Left

      by Scientician on Mon Jul 12, 2010 at 06:37:02 AM PDT

      [ Parent ]

      •  Actually, I think English is not his first (1+ / 0-)
        Recommended by:
        TracieLynn

        language (neither is it mine, but that's another story), so that can be excused. His dogmatism and self-satisfied ignorance, however, cannot.

        Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

        by Dauphin on Mon Jul 12, 2010 at 06:46:12 AM PDT

        [ Parent ]

        •  you are right it is not my first language (0+ / 0-)

          you really seem to know me.

          His dogmatism and self-satisfied ignorance

          never mind. let say it was just a history lesson for us germans that we learned but of course the horror of hyperinflation will never
          happen to a country with just good intentions and brave people.

          •  Oh, please. Of all (1+ / 0-)
            Recommended by:
            New Deal democrat

            types of inflation hyperinflation is the best-understood and we know exactly how to avoid it. Germany's frustration over that thing and their propensity for seeing hyperinflation in every inflation is crushing us on the European periphery. There is no wisdom there, just inconvenient trauma.

            As for knowing a lot about you, you mentioned a lot about yourself, and I have a good memory.

            Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

            by Dauphin on Mon Jul 12, 2010 at 07:07:48 AM PDT

            [ Parent ]

            •  oh i am ok with what you said (0+ / 0-)

              it is just we live in historic times which sometimes rhymes.
              and seeing some similaritys to our own history scares the shit out of me.
              but of course you are more than free to do what you think is right. it is just that i  have seeen this movie before and it didnt end well.
              but just my personal two pfenning never mind

              •  I've seen it before, and it did end well. (0+ / 0-)

                My country made a conscious choice of higher inflation during transition from communism in exchange for higher growth and lower unemployment, and we survived better than any other former communist economy. Sure, we had inflation of 16% for a few years, but it was worth it.

                Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

                by Dauphin on Mon Jul 12, 2010 at 07:18:56 AM PDT

                [ Parent ]

                •  poland ? (0+ / 0-)

                  if so i have an intresting link for you . if not never mind. but i think there is a diference between a systemic change (comunism to western capitalism) or the near breakdown of an economic leader state .
                  btw it is not the revenue short fall that is breaking the back of the countys it is the voodoo economy (cdo and other fancy finacial products)
                  that promised them to make much more cash (with alot more risk) and it worked great till it didnt.
                  worked anymore.

    •  You have exactly two choices (3+ / 0-)

      You either go with the idea that the economy can grow again with the right type of investment (not pieces of paper, obviously) or you write off all that debt you're worried about right now.  Mostly because it can never be paid back under the present circumstances.  I don't care what the banks think, default on all sorts of debt looms in the near future.

  •  I like it (2+ / 0-)
    Recommended by:
    New Deal democrat, Dauphin

    but I can imagine the howls from the crazy right about yet another stratagem in the long-running conspiracy to eliminate the last vestige of states' rights, or some such.

  •  They can't borrow (2+ / 0-)
    Recommended by:
    pico, gerald 1969

    There's a contradiction in your diary, and I think you may have misinterpreted the NY Times piece.

    As you say most states now have restrictions on borrowing, meaning they must balance their budgets.  They have to slash spending during a recession, which is bad policy.

    You are advocating states borrowing from the Federal government, but your premise is also that they are not allowed to borrow, which is correct.  So just as they can't borrow from the bond market, they can't borrow from the feds.

    That's why the NY Times proposed something slightly different from borrowing.  It said that the feds should advance payments that the feds know they are going to have to make to the states and then underpay those payments in the future.  

    For example, the feds reimburse states for medicare and medicaid.  So they could pay billions more than are supposed to be paid this year for those programs and have the states "pay back" the money with under payments in the future.

    I know this sounds like an accounting gimmick and it is, but just wanted to point out that the idea was to get around the prohibition on borrowing.

  •  Or the States could just (0+ / 0-)

    live within their means......what a novel idea....you know, just like when we don't have enough money - it's just what you have to do.

    The care of human life and happiness, and not their destruction, is the first and only legitimate object of good government. - Thomas Jefferson

    by ctexrep on Mon Jul 12, 2010 at 06:47:25 AM PDT

  •  In WWII the UK was practically broke. (4+ / 0-)

    When it entered the war it has already defaulted on US debt and Congress passed an act requiring England to pay in cash for all its purchases- money it didn't have.

    FDR realized that without the US, England will fall.
    So after he insisted that England will account for every asset it owns he made Congress pass the "Lend-Lease" act (the Republicans didn't like it even then, but then we had a president that, I guess, did not appreciate the true meaning of  bipartisanship).

    This bold move saved England, and by that the free world.

    On top of it, the money was not a gift. England finished paying its WWII loans to the US government only in 2006.

    All I'm sayin' is if the Federal government could loan money to the UK in its hour of need (and prop up its own industrial base in the process), there is no reason it couldn't do it again for the individual states.

    "Yeah Yeah. You vow - we MOVE!!" --Avery Schreiber

    by The Revenge of Shakshuka on Mon Jul 12, 2010 at 06:51:46 AM PDT

  •  I just saw this over at Bonddad's Blog. Let's (2+ / 0-)
    Recommended by:
    New Deal democrat, SilentBrook

    tip and rec this thing up, get it on Keith and Rachel and do this thing.

    Why this is not done already is beyond me.  It makes perfect economic and political sense.  GOP:  "But how do we pay for it.  It has to be paid for."  Well, we get paid back in full, maybe even with interest.  The GOP will cry.

    Let's do it.

    NDD, can you think of any downside problems with this so that we can fully air it out.

    It just seems too easy and too simple; like we are getting something for nothing.

    But I suppose the truly genius and elegant things appear that way.

    I am really excited by this.  I was pretty doubtful we'd be able to bail the states out the way they need it, and it is absolutely true that the state budget problems are putting a drag on the recovery.

    Keynes Bless You, NDD and Edley.

  •  Trillions to finance, not states (2+ / 0-)
    Recommended by:
    New Deal democrat, GrumpyOldGeek

    This of course would violate the principle of only socializing the losses of the wealthy in the financial world (and paying their bonuses) with trillions in bailouts.

    We can't go around saving the jobs of teachers, librarians, fire fighters, etc.  Those are good, honest professions, unlike bankers.  We don't want to corrupt them by helping them out.  

    And so what if not throwing a lifeline to the states starts a second leg of the Great Recession or start of the New Depression?  We've already backstopped the banks, so they can't lose anyway.  

    Note to Democratic leadership: I'm all out of carrots, but I still have my stick.

    by Celtic Pugilist on Mon Jul 12, 2010 at 07:25:22 AM PDT

  •  Better to let Repugs cause a state to collapse (1+ / 0-)
    Recommended by:
    New Deal democrat

    I'm afraid that's one message that might get through to the deficit hawks. On second thought, they would just blame the Democrats like they always do. Then their dream of forcing Obama to fail would come true.

    This morning, I listened to more of this crap. "Stop spending", they said. "This is the only way to reduce the deficit", they said. "The people must sacrifice", they said. "Fuck you", I said.

    "All people are born alike - except Republicans and Democrats" - Groucho Marx

    by GrumpyOldGeek on Mon Jul 12, 2010 at 07:59:40 AM PDT

  •  Late to this, but this seems like (1+ / 0-)
    Recommended by:
    New Deal democrat

    a really elegant solution.  Has there been any indication of anyone in Congress noticing/responding to an idea like this?

    Saint, n. A dead sinner revised and edited. - Ambrose Bierce

    by pico on Mon Jul 12, 2010 at 11:55:23 AM PDT

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