Obama's Aid to States

One of the most important items in President Obama's stimulus package is his contemplated aid to states. This is an important component of heading off the "downward spiral" a strong recessionary economy sets in motion.

The spiral works like this. States have to balance their budgets. They cannot deficit spend like the federal government can. When the economy falters many individuals lose their jobs or earn less. Many companies make less profit or go out of business altogether. The tax contributions of these people and companies go down. With less money coming in, state governments suspend projects and lay people off. The laid off workers join the unemployed, spending less in the economy and paying less taxes. The companies who have lost their state contracts lay off more workers too. The more people without jobs, the weaker demand in the economy gets and the worse the recession gets. It's a classic catch-22.

In my city of Visalia, California a major street project on Mooney Boulevard, Visalia's main thoroughfare, has been suspended by the state budget crisis. The road remains torn up in many places, impeding access into local businesses; the contractors are without work. The phenomenon is nationwide. In Alabama, for example, the budget crunch has resulted in a 7.7% reduction in state jobs.

There is only one entity capable of reversing this contraction, the federal government in Washington. After meeting with the nation's governors in December, Obama appears ready to act. See the Wall Street Journal article on that here. California, with over 11% of the country's population, could be getting a bit more than $21 billion. That could erase about half the state's projected deficit and prevent the loss of many more jobs than would otherwise occur.

Will this recovery plan, designed to create or save now 4 million jobs, be expensive? Absolutely. But what is the cost of doing nothing? More than 2.6 million jobs have disappeared in the past year. What is the cost of that? If the dynamic goes on purchasing power will continue to decline and suck the entire economy down the maelstrom. The key is to make sure the funds, perhaps $850 billion in all, are actually spent on things that will help produce purchasing power that will circulate through the system. As Obama said in his Inaugural, the issue is not big or small government, but effective government.

In the bargain, as in the New Deal, we should also be getting some useful assets, such as modernized electrical and communications grids, restored roads and bridges, a jump on green energy production and current energy conservation, among many other long overdue infrastructure items.

As a friend of mine who is a leader in rural development in Oregon says, localities cannot act if they are offered loans. They are strapped and cannot take on more debt when they cannot even afford to meet current obligations. This is the kind of approach it is going to take to get the country moving again. We will see over the next three to four weeks whether congressional Democrats will have the discipline to stick to the essential priorities and whether congressional Republicans will decide to share credit for the recovery program as Obama is offering them or opt to reject it on the grounds they will be able to make hay if it fails. It should be interesting. In the meantime, however, the nation needs action, bold and swift.