What's Happening at the Grass Roots

Broadcast November 16, 2001

We hear a lot about a stimulus package coming out of Congress, eventually. Regardless of what combination of tax cuts and spending increases finally emerges, almost everyone agrees that the government has to spur the economy right now. Alan Greenspan and company can't do it alone. Cuts in short-term rates are helpful, but we can't fight this recession with one hand tied behind our back. We also need government to spend more and tax less now.

But the federal government isn't the only government in American whose spending and taxing affects the economy. There are also 50 state governments and hundreds of city governments. In fact, if you add up the budgets of all of America's states and cities, you reach almost the same figure as the federal budget, in the order of some $2 trillion this year. In other words, the fiscal policy coming out of Washington is only half of America's fiscal policy.

So what's the story with the other half? Are state and local governments stimulating the overall economy by spending more and taxing less, or are they dragging the economy by doing just the opposite?

The answer is, it's mostly a drag. Forty out of 50 states, and dozens of major cities, are now facing serious budget squeezes because the recession is reducing their tax revenues, and they also have to beef up security in the wake of terrorist attacks. So they're cutting back on other spending, and they don't dare reduce tax rates because then they'd have an even harder time balancing their budgets.

You see, unlike the federal government, America's states and cities face stiff penalties if they go too deep into the red. Their bond ratings drop; it's harder for them to borrow in the future. They may even violate their own constitutions, some of which require balanced budgets.

So at the very time we need government to spur the economy because businesses and consumers are sitting it out, state and local governments are pulling in their belts. To make matters worse, they're slashing all sorts of things people depend on when the economy turns sour, everything from homeless shelters to health-care clinics and job training programs.

So what's the answer? The federal government has to provide an even bigger stimulus in order to offset the drag coming from the states and cities, and part of that federal stimulus should be in the form of revenue sharing, whereby the feds give the states and cities the extra money they need to cope with the new security threats and also keep vital programs going through the recession -- a recession that now seems likely to be a long one.

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