It is, perhaps, the ultimate wonky policy issue: the need for better automatic stabilizers for state and local governments. As such, putting it on the national agenda is a real challenge. Nevertheless, it’s worth pushing, because it’s that important.
Paul Krugman has a great column out about the most underreported policy failure of the Obama years: the collapse of state and local government spending and, especially, employment. As Krugman points out, the key comparison is with the Reagan years, when total government spending and employment increased at a healthy pace.
Which is only to emphasize again that while Barack Obama and the Democrats passed the Dodd-Frank act in an attempt to fix the financial system and therefore make another Great Recession less likely, they never passed – and, really, never proposed – anything to make the internal government response improve next time. The problem is that since state governments generally must balance their budgets, and since revenues fall and spending increases for aid to the distressed during hard economic times, states have strong incentives to sharply cut their normal spending. Ideally, states would deal with this by storing away surpluses during good times, when their revenues go up. But we know that most politicians have only short-term incentives, and they are far more likely to spend those surpluses on tax cuts or new spending.
The obvious solution is to get the federal government committed to providing automatic help for the states during recessions. There are lots of ways to do this. It could be part of a long-term budget-neutral scheme in which the states give money to the federal government during good times in exchange for help during recessions (something which should, by the way, have the effect of slowing down state spending, so theoretically conservatives should like it). Or it could just be a flat-out grant from the federal government to the states. Either way, the key is making it automatic, just as increased aid to individual was made automatic in response to the Great Depression. Not all government should run on autopilot, but this is exactly the kind of thing where predictable reactions should be programmed in.
I’m convinced that there really was a missed opportunity on this one in Spring 2009. And “Better State and Local Government Automatic Stabilizers!” isn’t anyone’s idea of a campaign slogan. Nevertheless, I suspect it’s a substantively far more important issue that corporate tax reform or some of the other potential bipartisan legislation that might have a chance if a status quo election brings more divided government. At least, if enough people make enough noise about it.