How will budget cuts help promote economic growth?
It’s a question that I rarely ever see asked, and one that is never answered, certainly not in a state where the conventional wisdom is that revenue increases are impossible, even though we’ve never tried to make them happen. Instead the supposed “political reality” of no new taxes is trumping the economic reality that taxes are preferable to spending cuts in a recession. The result is that spending cuts are treated as inevitable even though they are a sure path to Depression.
Yesterday’s LA Times had a remarkable editorial calling for no delay or hesitation in making the cuts. But the only time they made mention of the economic impact of the cuts was when they argued against permanent revenue solutions:
Be smart about new taxes. Reject, for the current year, broad-based sales and income tax increases as damaging to the recession economy and as politically infeasible, but move forward on carefully targeted temporary taxes, specifically on tobacco, alcohol and snack foods, to prevent cuts in particular health and human services (but not necessarily agencies).
And yet this ignores the evidence gathered by Peter Orszag and Joseph Stiglitz which showed that income tax increases were actually better for the economy than spending cuts.
Had the opinion page editors read George Skelton’s column that ran in the same edition, they might have understood how that abstract point works out in practice:
Faced with what he calculates to be a potential $24-billion budget deficit in the fiscal year starting July 1, Gov. Arnold Schwarzenegger has proposed cutting state supplemental payments for the elderly and disabled down to the minimum allowed by federal law. It would be their third cut this year.
The Legislature already has approved a $20 monthly cut beginning July 1, lowering the grant for single people to $850. That’s it: No food stamps, and that includes any Social Security.
This was the cut Jean had read about. But the governor also is seeking another $20 trim starting in September, reducing the benefit to $830.
The rent for her one-bedroom condo is $850.
What Jean’s story shows is the ripple effect of safety net spending. I’ve heard it said that Cal-WORKS, for example, is de facto one of the most important rent subsidy programs in the state. When the state cuts aid to the needy, they have to make up the difference out of their own pocket. That means they have to cut back on other spending, which means more foreclosures, more rental vacancies, less consumer spending, less tax revenue, fewer jobs, and more business failures.
Nobody in Sacramento has explained to the people how these cuts will help produce economic recovery. They ought to, and we should demand that we get such an explanation before any legislator votes for a single cut. I want an answer to the $24 billion question. Who in Sacramento will give it?
I’m guessing that the cuts proposed have a large multiplier, similar to the estimate for the 1.73 multiplier for increased spending on food stamps.
Including money lost in federal matching funds, and the multiplier effect, let’s say the total lost economic activity is somewhere around 35 billion. That’s 2.3% of the state’s 1.5 trillion gross product gone, 3.5 billion in state and local taxes gone, 400,000 more unemployed, an unemployment rate jumping another 2%, 10,000 people forced into nursing homes because their home health care coverage disappeared, higher medical insurance rates for those with coverage, another billion dollar hit to our unfunded debt for unemployment insurance, thousands of additional failed small businesses, tens of thousands of additional homeless people, tens of thousands of additional homeowners pushed into default and foreclosure.
We know that many of the cuts involve primary job losses for tens of thousands of teachers, twenty thousand local government employees, tens of thousands of health care jobs lost.
We need someone with some strong credentials to extend all of this and add up the bill. Republicans certainly have their Heritage and Cato apologists working full time to say that tax increases will hurt.
These are direct effects to California residents, while some of the revenue changes, like repealing the 2 billion a year tax cut for multinational corporations, reinstituting a 1.2 billion a year state estate tax deductible against federal estate taxes, implementing an oil extraction fee that hits multi-national corporations, and tweaks to the corporate side of property tax, would have little effect locally, but would instead keep some of our money from leaving the state.