an earlier version cross-posted at Working America's Main Street blog
President Obama has delivered his first State of the Union address. But the economic recovery he would certainly like to see is in danger of being derailed by an inadequate response to the massive jobs crisis and a potential meltdown in a public sector threatened by huge state and local budget shortfalls.
The American Recovery and Reinvestment Act of 2009 included $144 billion in federal aid to state and local governments, and to a large extent helped avert mass layoffs in the public sector. But that aid extends only through this year, and the budget situations facing states and cities look worse down the road as tax revenues decline and public service funds dwindle.
Without major, additional and extended aid to states and municipalities, hundreds of thousands, perhaps millions of new job losses could occur -- virtually assuring a continuing deep recession and a lengthy postponing of any real recovery.
In a statement today, Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, AFL-CIO (AFSCME) said:
Unfortunately, we have learned in the past year that the American Recovery and Reinvestment Act (ARRA) was not big enough to stimulate a full-scale recovery. Unless we act now, more Americans –- including nearly a million public employees –- could lose their jobs as current federal investments run out and the vital services Americans need during tough times are cut to the bone. There simply won’t be an economic recovery if Washington turns its back on Main Street USA.
Alarm bells on the situation facing state and local governments have been ringing for some time. In an OpEd titled Invitation to Disaster earlier this month New York Times columnist Bob Herbert warned:
We didn’t pay attention to the housing bubble. We closed our eyes to warnings that the levees in New Orleans were inadequate. We gave short shrift to reports that bin Laden was determined to attack the U.S. And now we’re all but ignoring the fiscal train wreck that is coming from states with budget crises big enough to boggle the mind.
This is an arrow aimed straight at the heart of a robust national recovery. The Center on Budget and Policy Priorities has pointed out that if you add up the state budget gaps that have recently been plugged (in most cases, temporarily and haphazardly) and those that remain to be dealt with, you’ll likely reach a staggering $350 billion for the 2010 and 2011 fiscal years.
This is not a disaster waiting to happen. It’s under way.
Without substantial new federal help, state cuts that are now merely drastic will become draconian, and hundreds of thousands of additional jobs will be lost. The suffering is already widespread.
Additional fiscal relief for state and local governments is a key component of the American Jobs Plan proposed by the Economic Policy Institute:
We recommend that the federal government extend the state and local budget relief provided in the Recovery Act by $150 billion over the next year and a half, through state fiscal year 2011. The additional relief will save between one million and 1.4 million jobs.
In his excellent new book, False Profits - Recovering from the Bubble Economy, economist Dean Baker writes:
"At the top of any stimulus agenda should be the very mundane effort to get more money to state and local governments."
"Nothing is more harmful to the economy presenting a downturn than government spending cuts and tax increases that amplify the downturn's impact. Furthermore, many of the cuts are to essential services, such as health care for low-income families or special school programs for children who are having difficulties. Government support for these programs is needed more than ever during the downturn." (thanks to the author for his permission to quote)
It is nothing less than the nation's social infrastructure that is threatened by the budget crises at the state and local level. ProPublica reports that with two dozen state unemployment insurance funds already in the red
The record 20 million Americans who collected unemployment insurance benefits last year landed on a safety net that was already deeply frayed.
An extensive, in-depth report just issued by the Center on Budget and Policy Priorities makes clear that failure to extend critical funding initiatives included in last year's Recovery Act, such as the Temporary Assistance for Needy Families (TANF) Emergency Fund, would have dire consequences.
The impending reductions in basic cash support will cause affected families to cut back their expenditures. This will cause a further loss of jobs, as well as a significant increase in severe hardship and deprivation.
In fact this is already happening.
The Hunger Action Network of New York State said Jan. 19 after Paterson's budget address that the proposed cuts to welfare and homeless program spending would not only increase hunger and poverty in the state, but would drive up costs for taxpayers by placing the financial burden on local governments.
"The federal government consistently ranks New York among the worst in the country in helping welfare participants into jobs," said Andreas Kriefall, upstate director of Hunger Action Network. "Far more just end up moving from [TANF] to the safety net program, which is paid for entirely by state and county tax dollars. The governor claims to be using this budget to get the state on a sounder fiscal footing. He is in fact, digging the hole deeper."
The federal government itself, though, need not assume the entire responsibility of assisting state and local governments. In an intriguing column last month, The Nation editor Katrina Vanden Heuvel proposed that the Federal Reserve do for needy states and municipalities what it has already done on a massive scale for the banks through zero-interest loans and special lending facilities:
I know states need to deal with balanced budget mandates and debt ceilings, but I also know there is some flexibility there. Shouldn't states have access to zero-interest credit just like the Banksters? And couldn't that make a significant contribution to their overall fiscal picture?
"Even if it just made short term loans--90 days, for example--it could still save California and other struggling states a lot of money," said Dean Baker, co-director of the Center for Economic and Policy Research. "If it reduced their rate on short-term borrowing by 1 percentage point, this could be worth $100 million a year or so to a state like California that would have to do lots of short-term borrowing."
The Fed has the authority--granted by law in the 1930s--to lend to virtually any public or private entity in emergency conditions. At a time of emergency in the states--with schools being shuttered, libraries closed, and health services gutted--isn't it time to use that power to help devastated state and local governments?
Perhaps if Ben Bernanke wants to keep his job he should do what's right for the social infrastructure of Main Street America.