Bernanke to budget-cutting state and local governments: Don't shortchange education

By Neil Irwin
Washington Post Staff Writer
Wednesday, March 2, 2011; 10:38 PM

Even as state and local governments take difficult steps to balance their budgets and address long-term shortfalls in their pension systems, they should not neglect the education and training programs that are the key to the nation's competitiveness, Federal Reserve Chairman Ben S. Bernanke argued Wednesday.

Sticking his toe into an increasingly fraught political issue - a standoff over bargaining rights for public workers in Wisconsin is only the most vivid example of a debate happening in many states - Bernanke acknowledged that the trade-offs facing state officials are "daunting," but he made the nuanced argument that states could adjust their tax codes and budget policies to avoid having to make severe cutbacks during recessions.

Tax increases and budget cuts by state and local governments have already emerged as a "headwind" on the economy as a whole, Bernanke said in a speech before the Citizens Budget Commission in New York. The possibility of steep budget cuts at the state and federal level is one of two emerging threats to the economic recovery, along with higher fuel prices resulting from political instability in the Middle East.

A Fed report Wednesday said the economy continued growing at a moderate speed at the beginning of 2011, with conditions improving gradually in a wide range of industries. But it also identified rising price pressures, particularly for oil and other sources of energy.

Bernanke - a career academic before joining the government who also served on a local school board in New Jersey - urged state and local leaders not to shortchange education in their efforts to deal with today's fiscal problems.

"In the long run . . . the most important fiscal issue is whether the structure and composition of the government budget best serves the public interest," Bernanke said. "Research increasingly has shown the benefits of early childhood education and efforts to promote the lifelong acquisition of skills for both individuals and the economy as a whole." He added that the payoffs from preschool programs seem to be high.

While Bernanke said he does not advocate eliminating balanced-budget rules affecting states, he argued that they could take steps so their tax and spending patterns do not amplify economic booms and busts. For example, he said, they could build bigger rainy-day funds during good times for spending during downturns, and do more capital investment when times are bad.

He said that "an improving economy should help" states with their difficult fiscal straits but that "state and local government finances will remain under pressure for some time."

The pace of economic expansion was "modest to moderate" in January and early February, according to the "beige book," a compilation of anecdotal reports about the economy issued eight times a year by the Fed. It represents an improvement from the report issued in mid-January.

The details of the latest beige book, which is prepared in advance of each Fed policy meeting to help leaders of the central bank set monetary policy, show a broadening recovery. For example, retail sales were said to have increased in 10 of the 12 Federal Reserve districts, despite the impact of snowstorms in large parts of the country. Six of the 12 experienced improvement in the long-suffering commercial real estate sector. And 11 of the 12 "experienced solid growth in manufacturing production."

The job market also showed progress.

"Labor market conditions continued to strengthen modestly," the beige book said, "with all Districts reporting some degree of improvement."

In a more worrisome sign, however, higher fuel prices seemed to be spreading.

"Manufacturing and retail contacts across Districts reported rising input costs," the beige book said. "Manufacturers in many Districts conveyed that they were passing through higher input costs to customers or planned to do so in the near future."

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