As State Budgets Improve, Let's Prepare for Bad Times

How to end “pro-cyclical” state budgeting.
Photographer: Emile Wamsteker/Bloomberg

With the recession finally behind us, money is flowing back into state treasuries, as Reid Wilson reports today. This a good time to reiterate the need for federally backed, long-term, budget-neutral automatic stabilizers for state and local governments.

It's the ultimate wonky policy issue. It isn't exciting, but it's extremely important. The issue arises because state budgets have to be balanced each year. Recessions bring increasing demands on state services even as revenue tanks. In response, states either cut spending or raise taxes (sometimes, as Wilson notes, in hidden ways) just as the economy needs all the boost it can get. As Paul Krugman and others regularly point out, that "pro-cyclical" state budgeting played a significant role in delaying and weakening the recovery.

The federal government just could send money to the states during hard times. But that approach, as many argued when Democrats made such a proposal a few years ago, would have the unfortunate consequence of rewarding the most irresponsible states.

A much better idea is a mechanism for long-term budget-neutral stabilizers. The states could siphon some revenue to the federal government during good times, and that money would be available to the states when the economy goes south. Sure, states could do this on their own through rainy-day funds. However, there's a reason that, beginning in the New Deal, the federal government made a lot of countercyclical fiscal policy automatic: the politics of budgets can get squirrely during hard times, and even if everyone had the best intentions and stuck with smart economics, basic policy-making can take so long that fiscal policy becomes a joke.

It's unlikely that House Republicans would agree to anything like automatic stabilizers now, even though it's good policy from a conservative point of view. Regardless, it was a major mistake for Barack Obama and the Democrats to ignore this issue in 2009-2010, when they could have done something about it.We better to get ready to deal with it before it's needed the next time.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    (Jonathan Bernstein covers U.S. politics for Bloomberg View.He is co-editor of "The Making of the Presidential Candidates 2012."Follow him onTwitter at @JBPlainblog.)

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