Asking the Right Question about the State Budget and Stimulus Plans

At TVW's new and useful public affairs blog, Niki Sullivan aptly frames the budget debate: Is it a recession? Or is the economy "resetting?"

Microsoft, {CEO Steve Ballmer] said, is making cuts because they don?t see the economic downturn as a recession, they think the economy is resetting to a lower level of consumer spending.

It?s not just semantics: The difference is at the heart of the public budget-related disagreements between Republicans and Democrats here.

Go to the blog and listen to the distinctly different takes on the budget offered by Sen. Joe Zarelli and Rep. Kelli Linville. Zarelli points out that the state and embarked on an unsustainable budget path well before the recession. Linville contends that the deficit stems primarily from the economic downturn and defends spending decisions made in recent years as restoring cuts made during the previous downturn.

If you believe that the recession is just a cyclical dip, you might be inclined to use stimulus funds to maintain spending until the eventual recovery. If you buy the "resetting" argument, then you'll want to use this time to rightsize spending to a lower and sustainable level.

This opinion piece in Friday's Wall Street Journal by Peter Schiff makes a strong case for those who believe we're seeing a fundamental, long-term resetting.

The root problem is not that America may have difficulty borrowing enough from abroad to maintain our GDP, but that our economy was too large in the first place. America's GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall.

Welcome to the new normal. Even during the upcycle, state government was spending more than it collected in tax revenues. The recession sharply accelerated the inevitable budget collapse. Pulling back now won't be easy, but it's necessary. And we're beginning to see small steps in the right direction. Getting an earlier fix on revenues also seems like a good idea. 

Another encouraging move to increase budget sustainability is Zarelli's proposed constitutional amendment to increase deposits in the state rainy day fund.

After surveying the global economic picture and the "debt bubble," Schiff concludes:

Taking on more debt to maintain spending is neither sacrificial nor beneficial.

What's true of debt is also true of the use of one-time stimulus dollars to prop up a spending plan that cannot be sustained under normal economic conditions. Entrepreneur.com offers good advice to business owners, advice that applies equally to state budget writers.  (h/t eff Cornwall at The Entrepreneurial Mind)

The economy tanks. You have two options: hole up in a bunker and hope it ends before you run out of tinned peas, or innovate and emerge stronger than when the economy took the hit.

There can be no return to spending-as-usual. But we can use this time to build a better, sustainable budget that protects essential services while increasing economic opportunity.