Note: This is a cross-post from my group blog, The Realignment Project, and part 2 in a series about how to bring Keynesian economic policy to the state level.

Introduction:

In this post, I'm returning to a theme I initially explored in June, back when California was grappling with its budget crisis.

Now, after nearly two months of additional struggle, we finally passed a bill that cut $26 billion and raised no new revenue, and now we learn that the governor has possibly illegally cut a further $500 million, taking the axe to children's welfare ($80 million), health care ($400 million), Cal Grants (cut in half), HIV/AIDS Prevention and Treatment ($52 million), and domestic violence shelters (cut by 80%). In addition to the moral insanity of attacking the most vulnerable of our citizens at a time when they are most in need of support one must add the economic insanity of believing that you can reduce government spending by $31 billion in the course of a single year (including both the February and July cuts)  and not effect the state's economic recovery.

Lest this be seen as merely a California problem, a recent report by the National Governors Association notes that the collective budget shortfalls of the fifty states comes to a collective $200 billion shortfall. Given that the total Federal economic stimulus for this year only comes to about $400 billion, we are forced to recognize that our system of state government budgeting and finance is creating a massive economic undertow, weakening the impact of Keynesian stimulus by cutting spending and raising taxes (although they've been doing a lot more of the former than the latter).

Background:

Why is it the case that America's state governments have become so strongly pro-cyclical? The basic reason is that all but one state in the Union (Vermont being the exception) have some form of a balanced budget or debt limitation requirement, which makes it impossible to deficit spend during recessions.

Many of these requirements date back over a hundred years, following the Panic of 1837, which caused nine states to default on their “internal improvement” (i.e, transportation infrastructure) related debts in 1842, which prompted a wave of anti-debt measures. The state of New York, for example, adopted a new constitution in 1846, which required a 2/3rds vote for appropriations bills and a 3/5ths vote for any bill that would raise taxes or incur debts. Illinois' 1848 constitution required a 2/3 vote for appropriations, a balanced budget requirement, and a $50,000 cap on state debts. Similar waves of constitutional redrafting tended to follow other major recessions in which states suddenly were unable to finance their debts, such as the Panics of 1857 and 1873 (triggered by the failure of banks that had over-speculated on railroads).

The question is why we allow a “hobgoblin of little minds” over a hundred and seventy years old to continue to rule over us? Why, when even a total economics amateur like myself can pick up Keynes and learn about the “paradox of thrift,” do we continue to allow the political cliche that “well, families have to balance their budgets, so the government should too” to be the conventional wisdom of the stump speech? (Incidentally, given the fact that most American families are horribly in debt and are relying on their credit cards to make ends meet, this couldn't be less accurate).

A 50-State Solution:

One of the things that's often puzzled me about the progressive movement is our lack of willingness to use the initiative process to our advantage in both achieving policy ends and mobilizing the electorate – consider the way in which the Republican Party used anti-gay marriage propositions in 2002 and 2004 to gin up their right-wing base, change the political debate from economic issues to their wedge issues, and attack the civil rights and civil liberties of queer Americans. In 2006, we saw a little bit of this strategy on the progressive side, using minimum wage initiatives to increase working class turnout in states like Ohio, but to the best of my knowledge it hasn't become a standard part of the Democratic Party political toolkit.

Hence, the first step in establishing “50-state Keynesianism” is to promote, state-by-state an “Anti-Recession Budget Reform Initiative.” (if anyone has a better name for it, I'm open to suggestions). This initiative should amend the state constitution's balanced budget requirement to allow the state, when the economy is in recession (i.e, two quarters of negative economic growth) to run a limited deficit (two years maximum) for the purposes of funding counter-cyclical stimulus programs (limited to say, 5-10% of state GDP).  We should begin our push in those areas which are deep blue states and which tend to have weaker balanced budget requirements – New England would be a good starting place, especially with Vermont as the lone non-balanced budget state sitting there as a model for how deficit spending won't destroy western civilization. The Rust Belt states that have been especially hit hard, like Michigan or Ohio, would probably be receptive to a message that it's better to spend money to create jobs than to balance a budget by throwing teachers and other state workers out of their jobs. As usual, the major prizes would be New York and California, given their size and political weight.

Second, in order to build state capacity for Keynesian economic policy, we should also push for the creation of State Reserve Banks.  Here, I really have to credit Ellen Brown over at the Huffington Post for promoting this idea and bringing it to my attention. This amazingly simple yet powerful idea takes its example from, of all places, the state of North Dakota, which has operated the Bank of North Dakota since 1919. It works like this – the state charters a public bank, and instead of placing its reserves, tax revenues, deeds for public lands, and so forth in a variety of state banks (as most states do), it puts all of them in the public bank to act as the bank's capital base. (Note: as long as the bank only circulates U.S dollars, it's perfectly constitutional, avoiding the Article I, Section 10 bar against states issuing coin or bills of credit) The bank then acts like a reserve bank, using the power of “fractional reserve lending” (i.e, that a bank can generate much more money in loans than it keeps in its vaults, thus multiplying many times over its actual reserves, as long as it keeps back a portion to redeem deposits) to generate loans, act as a local “lender of last resort” (thus buttressing the work of the Federal Reserve and FDIC during credit crises), and (this is the key bit) allowing the State to borrow money in order to deficit spend in a recession without relying on the ideologically-biased bond market and the credit agencies who've taken a hammer to state bond ratings while maintaining A ratings for AIG and Lehman Brothers. The State could then use these loans (which would be much cheaper than ordinary bonds, given that its essentially paying interest to itself) to maintain public services and fund public works and other stimulus measures in a recession.

Third, as I've suggested before, one of the best ways to fight a recession is to create jobs directly. Hence, with all this new fiscal and monetary muscle, we should set up a WPA-like system of State “Job Insurance.” While the Federal government is best suited to this task, in that it has superior powers to deficit spend and print money, state governments could run their own permanent job insurance systems, establishing State J.I Funds, contributions from workers and employers, and assistance from the general fund. The idea would be to create short-term jobs (say 6-month duration, with a right to re-apply after a job search at the end of 6 months) at $10 an hour – the number of jobs directed at reducing unemployment by whatever proportion (say, 50% in the example below) needed to keep unemployment at or below a specific level. As the economy turned around, these jobs could be gradually eliminated (at 1/2 the rate of job growth, for example) in order to not damage the recovery as happened when the WPA was suddenly downsized in 1937-8. In return for a monthly contribution, workers would have a right to one of these jobs, as allocated by some fair procedure (order of application, random lottery, etc.).

Let's take California as an example. The state has a normal workforce of 18.5 million people, of which 2.146 million are currently unemployed (a rate of 11.6%). The objective of a new job insurance system would be to create enough jobs to bring the rate down to an acceptable level – say, by 50% down to 5.8%. (Note, while I would consider 5.8% unemployment to be unnecessarily high, and while we may want to consider ultimately lowering the official “acceptable rate,” for the moment, let's consider simply meeting the immediate crisis). In order to create 1,073,000 jobs, the state would need to spend approximately $40 billion (taking into account wages, payroll taxes, and non-labor costs such as equipment, materials and land – although the state would probably require counties and localities to put up at least part of the latter two items).  Now, if we were simply to fund this off of Job Insurance contributions, you’re looking at $200 a month, which is quite high, although I imagine that it would be affordable for middle class folks and up. However, if you were to split the costs between contributions and State Reserve Bank lending (and/or general fund contributions), you could drop it to $100 a month (50-50), or $33 a month (say, 33/66 or, 33/33 and 33 from general fund).

Note that this is the cost if you have to do it all in one go – if we think about this a system to prevent the next recession, you can implement the Job Insurance system in economic good times, and build up a reserve, which would allow you to run the system on still lower job insurance premiums. Moreover, if you create a target for jobs to be created when unemployment grows to a certain level, the lower the level, the cheaper the program. If, for example, California had done this back in October 2008 when unemployment was only 8%, it would only have cost $29.6 billion to reduce the unemployment rate down to 4%, which would have buoyed consumer spending, forestalled foreclosures, and prevented further job losses in the private sector.

Now, I fully acknowledge that this would be a radical transformation of state economic policy, and that certain elements, especially the Anti-Recession Budget Reform Initiative, would be politically tricky to thread the needle on. But I would say that if you can't sell the public  job insurance that costs $33 or less a month, can't persuade people that freedom from economic uncertainty is within their grasp, can't tap into people's desperate desire to be free from the fear of destitution, you shouldn't be in politics.

Note: this a cross-post from my group blog, the Realignment Project.

“Education, then, beyond all other devices of human origin, is the great equalizer of the conditions of men, — the balance-wheel of the social machinery. I do not here mean that it so elevates the moral nature as to make men disdain and abhor the oppression of their fellow-men. This idea pertains to another of its attributes. But I mean that it gives each man the independence and the means by which he can resist the selfishness of other men. It does better than to disarm the poor of their hostility towards the rich: it prevents being poor.”

– Horace Mann, 12th Annual Report to the Massachusetts State Board of Education (1848)

In my previous post about education, I mentioned that the education reform debate has largely skirted the problem of affordability of higher education, preferring to direct their attention more towards college preparation and the K-12 system. As I said at the time, one of the things that unsettles me about the “Educational Equality Project” type of education “reformer” is the extreme economistic trend of their thought – education is about getting jobs and making the workforce more production, hence the extreme emphasis on reading, writing, math, and science, as opposed to anything about art and music, or history. I may be overly broad here in my description, and if I am, I apologize, but it's to a point. The purpose of public education is not to meet the needs of the labor market – it is to meet the needs of democracy.

Obama's recent proposal to pump an additional $12 billion over the next ten years into community colleges speaks to something of this tension. On the one hand, he makes the economic argument that “We will not fill those jobs, or keep those jobs on our shores, without the training offered by community colleges;” on the other, he ties the public investment in education to the broader goal of democratizing the economy. “Time and again, when we placed our bet for the future on education, we have prospered as a result …that's what happened when President Lincoln signed into law legislation creating the land grant colleges, which not only transformed higher education, but also our entire economy.  That's what took place when President Roosevelt signed the GI Bill which helped educate a generation, and ushered in an era of unprecedented prosperity.  That was the foundation for the American middle class.”

Background:

Obama's invocation of the Morrill land grant colleges and the GI bill should remind us that one of the great American virtues, almost from the beginning, is a faith in the virtue of democratic education. George Washington was a lifetime proponent of a National University, the purpose of which, he said, was “the education of our Youth in the science of Government. In a Republic, what species of knowledge can be equally important? And what duty, more pressing on its Legislature, than to patronize a plan for communicating it to those, who are to be the future guardians of the liberties of the Country?” In his repeated addresses to Congress on the topic, Washington linked the establishment of a national public institution of higher education with the future of the Union itself: “In the general, juvenile period of life, when friendships are formed and habits established that will stick by one, the youth from different parts of the United States would be assembled together and would, by degree, discover that there was not just cause for those jealousies and prejudices, which one part of the union imbided against one another.”

The Morrill Land Grant Act of 1862 was not merely about establishing agricultural programs. Co-written by a merchant's clerk who never attended college and a schoolteacher and signed into law by a President who had perhaps one year of formal education at a time when only the sons of gentlemen attended college, it was also an aspirational statement about the kind of society that the party of “free soil, free labor, and free men” wanted to build – one where higher education would be “accessible to all, but especially to the sons of toil.” In its own way, too, the City College of New York, the oldest free public institution of higher education, was a radical institution from the very beginning. Its founder called upon the state of New York to “Open the doors to all… Let the children of the rich and the poor take their seats together and know of no distinction save that of industry, good conduct and intellect;” its first president summarized CCNY's mission thusly – “The experiment is to be tried, whether the children of the people, the children of the whole people, can be educated; and whether an institution of the highest grade, can be successfully controlled by the popular will, not by the privileged few.”

And of course, in 1960, Governor Pat Brown's Master Plan for Higher Education in California grounded its call for a revolutionary three-stage system of the University of California, California State University, and Community Colleges on the principle that “state colleges and the University of California shall be tuition free to all residents of the state.”

The point of this extensive exegesis is that the purpose of public higher education has always been about, contrary to Obama's speech, more than even just democratizing the economy.  It has always been about making a more democratic society, whether it be forging a national identity, abolishing social distinctions, state provision of a universal public good, or providing a vehicle for the children of the poor to seek their education freely.

Current Situation:

So where does this noble legacy of democratic education stand today? Well, two weeks ago I received the following email from UC President Mark Yudof, effectively sending out a fiscal SOS to the UC community:

“In the past 20 years, the amount of money allotted to the University through the state budget has fallen dramatically: General Fund support for a UC student stood at $15,860 in 1990. If current budget projections hold, it will drop this year to $7,680.

Moreover, it now appears likely the UC system, in this current fiscal crisis, will be ordered by Sacramento to absorb yet another $800-plus million in additional cuts. Its 2009-10 core budget will be reduced by an estimated 20 percent. This will bring the amount of state investment in the University down to $2.4 billion – exactly where it was in real dollars a decade ago.”

This then is the bitter fruit of the compact signed between Governor Schwarzenegger and then-UC President Dynes, which supposedly at the time was going to “bring the promise of renewed fiscal stability for public universities in California.” The ultimate result, however, has been a near-perfect execution of Shock Doctrine, effectively destroying a decade's worth of efforts to improve and expand public funding for higher education – a slow-motion privatization, if you will. At the same time that the U.C has been struggling with one funding crisis after another, despite the promises of the compact, the result has been a massive shift of economic burdens from the state and the university onto the student body. As I noted previously, the cost of attending the U.C has now doubled, from the less than $4000 per year in 2003 to more than $8000 in 2009. At the current rate of progress (10% increase in tuition per year), the U.C's in-state tuition will be indistinguishable from the private university average in twelve years. In my eyes, this constitutes an enormous tax on the student body and their families.

And this is hardly just a California story. As this article points out, the University of Washington's 26% cut also drops its state funding back by a decade, the University of Illinois' fee increases are on-pace with the U.C's, and SUNY is even outpacing the U.C with a 14%. The larger problem is that the limited fiscal capacity of states to deal with recessions, the Federal inattention to the cost of higher education for the last eight years, and the broader anti-tax politics that have gripped this nation have meant tha public university is an easy target. State and federal legislators looking to make cuts-only budgets see institutions that can raise private funds and increase fees and hand down cuts that would be unthinkable in other areas, banking on fund raising and tuition hikes to keep the public universities running.

This crates two larger problems. The first is the privatization of the public university – a public university is a public trust, a place that is supposed to cultivate democratic citizenship, to create the expertise that governments can make use of in making public policy decisions, and a place which embodies the ideals of a better society. The second is ever-increasing inequality –  as the burden of education increases on students, the result is a generation whose future life choices are increasingly determined by the pressures of ever-mounting debt, and increasing class inequality between those whose families can pull the full freight and those who must support themselves. As research has shown, the children of the affluent go to college at a higher rate than the children of the poor – even when the children of the poor perform higher academically than the children of the rich. Compare, for example, the difference in attendance rates between the 4th quintile (highest-achieving) students from families making less than $20k a year and students from the 3rd or 2nd quintiles from families making more than $100k a year. Clearly, it is better to be born lucky than smart.

Solution:

While the gross disparities between the richest and the poorest ought to shock the conscience of any American who cherishes our national mythos of opportunity, egalitarianism, and meritocracy, it's also true that people everywhere often show a less sharp concern for the plights of others than their own misfortunes. But take a second look at that chart, and you see than class inequality goes all the way down the line, with the children of the merely affluent doing less well than the children of the rich, and the children of the middle class less well than the children of the affluent, and so on – even with children of roughly equal ability and achievement. Rarely have I seen a more clear case for a cross-class community of interest.

So how do we move, as it were, forward to the past?

Morrill 2.0 – Universal, Public Higher Education for All:

• Federal/State Endowment Assistance – given the many failures of the existing per-student assistance system and the way that it has bogged us down in a patchwork of student loans and aid, and the vulnerability of this system to economic shocks, instead we should establish a system whereby the Federal governments and the states collaborate to provide a one-time $5 billion addition to the endowment (to be held in long-term T-Bills, no investing the money in derivatives or other fashionable ventures) of each state university, gradually phasing it in university by university over the next ten years (yearly cost – $25 billion). This money should be based on a guarantee of tuition-free education based on in-state rates, with modest fees for out-of-state students.
• Independent Financing of State Universities – along the same lines,  moving the state universities from a miserly yearly appropriations to a steady source of public funds, one alternative that presents itself is A.B 656 in the California state legislature (or whatever version of A.B 656 might become a proposition), which proposes an oil excise tax to fund higher education in California, similar to the way that oil taxes fund the University of Texas. Obviously, not all states have major oil revenue, but most states do have some industry that is the center of the economy, and it is only fair for the industry in question to kick in some money to pay for the education of the college graduates it needs. Hence, I could see a small tax on stock transactions to fund SUNY, since Wall Street needs huge numbers of college grads, and so on and so forth. This industry excise tax should also be balanced with a guarantee to keep tuition low and enrollment expanding (as well as the number of campuses) to maintain access to public higher education.
• Exporting the Brown Model – the evolution of the Morrill land grant colleges has meant that, in a country supposedly dominated by federalism, we actually have a rather standard pattern of having a single state university that more often than not is a large, Research 1 institution. However, I would argue that we need to, over the long term, popularize the three-tier system of state universities, state colleges, and a unified system of community colleges across the 50 states, if we are to truly expand higher education to all students who are ready and interested in furthering their education.
• Higher Education Means Vocational Education Too – in my previous post, I talked in general terms abou the lack of attention paid to vocational training and technical education and the somewhat veiled contempt that some education reformers seem to have for non-academic higher education. Simply put, not everyone wants to go to college or will ever be happy in college, and while generally our economy is becoming more reliant on education, it would be a mistake to assume that we are going to move to 100% of the population with a college diploma and a white-collar job. To begin with, the current situation masks the extent to which problems with our K-12 education system has led employers to use bachelor's degrees to substitute for high school diplomas in straining their candidate pools for people who are literate, numerate, and know how to do basic tasks like use a computer, write a memo, operate a spreadsheet, read technical documents, give a presentation, etc. Secondly, as the American economy develops, we are going to need more and more skilled labor  that require some form of certification that is not college-oriented – as we develop a “green economy” based on “alternative energy,” we're going to need a lot of electricians to install new grids, new wiring systems, solar panels and wind farms, and so forth, and you don't go to a traditional 4-year college to learn to be an electrician. Hence, I would recommend extending our guarantee of higher education for all to be a guarantee to technical education, vocational education, and apprenticeship/job training programs, paying the way at, say, state college or community college rate for any student who agrees to stick through the program. But the point is that the choice to go into academic or technical education should be freely chosen, without the consideration of cost.

Note: this is a cross-post from my group-blog, The Realignment Project. Check it out, and if you see something you like, pass it on!

In thinking through my recent post about the California budget mess, and in following the politics of what is now the second full round of budget negotiations this year, one of the frustrating elements of budget politics (at least for progressives) is the lack of connection in the minds of the electorate between taxes (which they generally dislike or can be persuaded to vote against, although as progressives have pointed out, this is not always true) and spending (which they generally like, in pretty much all cases). Even though it’s impossible to increase spending on public priorities, cut taxes, balance the budget, and decrease borrowing at the same time, voters apparently would like to do just that.

The problem for progressives, though, is that this makes it very difficult to raise taxes, even when it’s going towards public policies that are really popular. Which is why I was pleasantly surprised to see the California state legislature ’s Budget Conference Committee increase the VLF (Vehicle License Fee) to save the state’s parks from being shuttered. Not only was this good in and of itself – parks are a public good that people should be able to enjoy, closing the parks loses a lot more in tourist revenue than it saves n parks dept salaries and maintenance costs – but it was also a rare case of a tax increase that’s explicitly targeted to a public policy. Henceforth, the debate over increasing the VLF, which was one of the factors that brought down Gray Davis and brought in Arnold Schwarzenegger, is no longer just a debate over whether taxes should be higher or lower, as the Republicans would prefer. Now it’s a question of which is better, $15 less on your VLF or state parks – and that’s a debate we can win.

Targeted taxes and special funds are a very wonky area of public policy that I think is criminally under-emphasized in progressive circles, precisely because these two things do the impossible: they directly link taxes with the programs they finance. Targeted taxes are something that people are generally familiar with – gas taxes generally fund transportation, cigarette and alcohol taxes generally go towards health care – but only on a small scale.  Likewise, we’ve all heard of special funds – budgetary pots of money that are reserved for specific policy purposes  – like the Social Security Trust Fund, I think that one way to solidify progressive taxation would be to sub-divide existing progressive taxation (income, property, inheritance taxes, capital gains, etc.) into separate targeted taxes: a Health Care Tax (made up of 1/xth of current income taxes, 1/xth of capital gains taxes, etc.), an Education Tax, a Public Transit Tax, and so on. Each of these would go into a Health Care Fund, an Education Fund, and so on.

In a purely technical sense, this is just accounting gimmickry, since the state’s General Fund and its different budget areas essentially do the same thing. But in a political sense, this has the important effect of dis-aggregating general taxes which fund the abstract entity known as the government, and making our policy priorities visible and concrete, forcing people to think about the ends of public finance. Now instead of railing against taxes that are too high and wasteful spending int he abstract, which conservatives love to do because it allows them to mobilize people’s dislike of taxes without running afoul of people’s approval of specific government spending, conservatives would be forced to argue for cutting specific taxes that fund specific programs. Now instead of having to defend the abstract principle of government and the take-your-medicine argument for the necessity of taxes, progressives can go out and say “we want to expand health care coverage, lower college tuition, and put solar panels on every house in California – so go out and vote for an increase in the Health Care Tax, the Education Tax, and the Environment Tax.”

In a sense, what this would do is to take the chaotic process of ballot-box-budgeting, where priorities are set randomly, without a view to the overall picture, and bring it into the legislature in a way in which public priorities can be debated, voted on, then presented to the voters. This would also allow the legislature to explain in a absolutely straightforward way what they did and why, and sell the budget as a progressive document to the electorate.

The image above is an example of how this could change the politics of budgeting – it comes from a 2002 Washington State Budget, and even though the idea for it came from a group of Third Wayist policy advocates who I dislike, I think the idea can be repurposed for genuinely progressive ends. Because what this does well is to break down the health care budget into what it actually covers, and shows the implications for increasing and decreasing spending – and there, progressives can use the public’s support of social policy ends to our advantage – by showing that budget cuts (and therefore, tax cuts) would mean cutting off X number of people, or shuttering programs A, B, and C, or cutting back on quality of services. And here again is a debate we can win.