Hit the accelerator, not the brake

Incidents like the closure of part of Sullivan County’s jail, which seems to be the final nail in the coffin of any hopes that the county could avoid building a new one, call our attention once again to the financial woes of local government during this time of economic stress. By some estimates, building the new jail will tack another 10 percent on county taxes at a time when local incomes are still reeling from the sluggish economy—not to mention the household income lost due to cuts in county payrolls. Other instances of the impact of funding shortages, like the possible closure of Duggan school in Bethel, are not hard to find.

Financial blows like these, which are being experienced by local governments on both sides of the river, are the last thing we need if the first tentative signs of economic recovery are to blossom into sustained growth. Unfortunately, we do not see sufficient recognition of that fact at higher levels of government.

As best as we can tell, the so-called “recovery” has been manifested largely in the rally in Wall Street stock indices that occurred over most of the last year (and even that seems to be faltering). The strong Gross Domestic Product (GDP) growth recorded for the latest quarter was due largely to restocking of inventories; in other words, businesses were ordering goods without consumers having evinced any strong propensity to buy them. In addition, that GDP growth was accomplished during a period when 300,000 jobs were lost. There’s no point in restocking inventories unless consumers start doing some sustained buying, and that’s not likely unless the job and wage situation improves. Add rising local taxes and a decline in local government employment to this picture and the probability is that the apparent rebound is only temporary.

New York’s Governor David Paterson showed some sensitivity to this issue in his recent proposal to put a moratorium on new unfunded mandates, while modifying the impact of some existing unfunded mandates. The Sullivan County jail in particular—a prime example of an unfunded mandate—will unfortunately not benefit from the Paterson proposal. Still, it’s a step in the right direction.

Unfortunately, the same cannot be said for government at the federal level. While economists like Nobel laureate Paul Krugman and Clinton labor secretary Robert Reich point out that government, as the consumer of last resort, is the only sector in a position to propel the economy forward at this point, President Obama has gone in the opposite direction with the proposal of a three-year freeze in discretionary spending.

While there are no doubt individual federal programs that can and should be frozen or even eliminated, what the economy needs overall at this vulnerable stage is more stimulus, not less. FDR found out what happens when you cut spending too early in the recovery from a great economic meltdown: he did so in 1937, and it produced a deep recession in which industrial output dropped 30 percent and unemployment jumped by five percentage points over the course of 13 months.

It is against this background that Krugman, Reich and others recommend a second round of stimulus, with Reich writing, “It should mainly focus on bailing out state and local governments that are now cutting services and raising taxes, and squeezing the middle class.” Something like Sullivan County’s new jail, which is also an investment in new infrastructure, would certainly be a prime candidate for such stimulus funds.

The idea of a spending freeze makes a nice little political crumb that Obama can throw to his opponents in one of his trademark efforts at bipartisanship. But bipartisanship is not a legitimate goal in itself, and if it gets in the way of a real, sustainable recovery, it must be discarded. We hope that the Obama administration rethinks its attitude toward the timing of fiscal austerity, and recognizes that the economy in 2010 is still too vulnerable for government to hit the brakes, just as it was in 1937. When the government is the consumer of last resort and it stops spending, the entire economy crumbles. We hope that the Obama Administration changes course before we all learn that the hard way.

Dr. Punnybone

Near Death Experience