Paul Krugman has a good column today about how state balanced budget needs lead to perverse outcomes during an economic crisis that demands fiscal stimulus.

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers – state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.

These state-level cutbacks range from small acts of cruelty to giant acts of panic – from cuts in South Carolina’s juvenile justice program, which will force young offenders out of group homes and into prison, to the decision by a committee that manages California state spending to halt all construction outlays for six months.

As Krugman notes, it’s crazy to cut public spending at the same time that private spending is drying up.  It’s a recipe for a Hoover-esque depression with no investment or economic activity, and no way to increase consumer spending or create jobs.

Krugman acknowledges that balanced-budget rules are only a part of this problem in the states.

The answer, of course, is that state and local government revenues are plunging along with the economy – and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

Are governors responsible for their own predicament? To some extent. Arnold Schwarzenegger, in particular, deserves some jeers. He became governor in the first place because voters were outraged over his predecessor’s budget problems, but he did nothing to secure the state’s fiscal future – and he now faces a projected budget deficit bigger than the one that did in Gray Davis.

That’s absolutely true.  And the suffocating 2/3 requirement is most of the problem here.  But once we get out of this crisis, hopefully with some assistance from the federal government for Medicaid and public works, we need to think a little more creatively about how to reduce the risk of a state’s fiscal trap on the greater economy.  One idea is allowing state governments the ability to deficit spend, perhaps through the creation of some federal Stimulus fund that states facing certain deficits can tap.  This is the framework behind the National Infrastructure Bank proposed by Sens. Dodd and Hagel last year, but I would broaden it out.  There’s also the option of federal guarantees for state bond markets to increase investor confidence, or allowing states in a fiscal emergency to borrow at lower federal rates in the short term.  These are steps similar to those being used to bail out banks, with the Fed intervening in the commercial paper market, and they should be tools for the states as well.

With structures like this in place, just maybe we can phase out the balanced budget amendments that force these bad choices on the states.  Ultimately, California can’t ask for help until they help themselves.  The bond market will simply not improve until investors are assured that the state can manage its own affairs.  But after the failed Schwarzenegger Administration, the next governor should think seriously about giving the state flexibility in an economic downturn, rather than going along with the necessary steps to making things measurably worse.

Arnold Schwarzenegger has finally managed to bring people with differing viewpoints together to agree in a post-partisan fashion.  See, nobody likes his revised budget plan, as Bob Salladay reports.  Conservatives think that it doesn’t go far enough, spends too much, and relies on too many shaky budgeting gimmicks, like privatizing the lottery for a short-term cash infusion.  Democratic leaders have rightly called it mean-spirited and cruel for slashing aid to the poor and cutting public transit funding, among other things.  The state’s pundit class has sneered at the cynical nature of saying that you could balance the budget responsibly to begin with.  And the Legislative Analyst’s Office, who are supposed to play it right down the middle, criticize the revision as well.

The administration has attempted to address a $2 billion decline in the state’s fiscal outlook. Due to several overly optimistic assumptions, however, the May Revision overstates its reserve by about $1.7 billion-leaving an estimated reserve of $529 million. Even this reserve level would be subject to considerable risks and pressures. As a result, the Legislature will face a significant challenge to develop a 2007-08 budget that realistically reflects revenues and spending while maintaining a prudent reserve. As it sets its own priorities, it should identify solutions that realistically balance the state’s finances on an ongoing basis while also avoiding new ongoing commitments (absent identified funding to pay for them).

The Governor is more about fantasy than reality, anyway, so it shouldn’t be suprising that his budget numbers would be a carefully crafted fiction.

A budget is a moral document.  Priorities in the budget mirror priorities in the real world, what kind of California you want to see.  Arnold Schwarzenegger wants to see a California where investment bankers get rich while the poor and the middle class who struggle to survive are left on their own.  And this would have been worse if the state didn’t find a little more unexpected revenue at the end of last month.  Nobody should be surprised that this Governor automatically thinks “cut the poor” when faced with a budget crunch.  That translates directly to who he values in society.  This isn’t the result of Arnold “reverting back” to his pre-post-partisan self, as Speaker Nunez claimed in his statement.  This is who he’s always been.

UPDATE: One thing that should be stated is that the Governor is very much an acolyte of Reaganomics.  He puts everything on credit and passes the problems off to future executives and future generations.

The state of California is not generating the revenue that they expected.  This is clear and it’s been known for some time.  The original budget that the Governor proposed, based on those sunny estimates, is obsolete.  In order to balance the budget, spending will have to decrease or revenue increased.  We know what choice the Republican will make.

Gov. Arnold Schwarzenegger is likely to call for state spending cuts beyond those he proposed in January when he presents a revised budget to the Legislature next week, administration officials said Tuesday […]

In January, Schwarzenegger outlined a $103 billion general-fund budget for the 2007-08 fiscal year and proposed balancing it by withholding cost-of-living increases for welfare recipients, cutting welfare payments to children whose parents fail to comply with work requirements, and reducing aid to the homeless, among other things.

The cuts to welfare will remain in the budget the Republican governor is slated to unveil on Monday, Palmer said. That could set up a showdown with Democratic lawmakers, who have made it clear they oppose reducing the social safety net for children.

But don’t worry, there’s a Plan B; privatizing the lottery!

over…

Gov. Arnold Schwarzenegger is poised to call for privatizing the state lottery, a move that would bring California a cash infusion of as much as $37 billion to help solve pressing budget problems but also could sacrifice a major revenue source for decades to come.

….It comes at a time when the state is facing only a modest budget deficit for the coming fiscal year – about $1 billion. But billions more in bond payments will be due soon after.

This is “kick-the-can-down-the-road” budgeting, and it’s no different than George Bush trying to run out the clock on Iraq so that the next executive has to clean up the mess.  It’s irresponsible to put so much of a debt burden on future generations.  We’re looking at hundreds of billions of dollars in debt for decades and decades, in bond issues and the loss of revenue for short-term gain.  Kevin Drum thunders on this, and he’s absolutely correct:

Once again, Arnold “We Have To Stop This Crazy Deficit Spending” Schwarzenegger is desperately trying to figure out a way to increase our deficit spending so that he can continue to pretend that he hasn’t raised taxes. That’s all this is about.

He’s already done this once with his deficit bonds, which will have to be repaid out of increased taxes eventually, and now, in order to make sure that “eventually” is sometime after he leaves office, he wants to raid the lottery to tide himself over. The result, of course, will be lower revenue in the future and therefore higher taxes. But not on his watch.

Schwarzenegger may have a sunnier persona than George Bush, but the cynicism on offer here is even worse than Bush’s. Arnold knows perfectly well he’s raising taxes. He’s just hoping the rest of us are greedy enough to allow ourselves to be convinced otherwise.

We’re going to have three and a half more years of this nonsense, of this focus on short-term glitz at the expense of long-term security.  We are getting played, and I would like to see some of our Democratic leaders in this state make this point forcefully.