EDITOR'S NOTE: This was originally posted yesterday. But Sandeep is onto something here, so, Editor's Choice, we're putting it back in the mix today. 


I watched Barack Obama's Tuesday press conference, and was duly impressed by the strong case he made for quick enactment of the $838 billion (in the Senate version) federal stimulus package. Obama forthrightly stated what is becoming increasingly obvious, that "we are going through the worst economic crisis since the Great Depression." He's right: 3.6 million jobs have already been lost nationwide, he pointed out, and the pace of job losses continues to accelerate alarmingly.

Drawing on well-tested Keynesian macroeconomic theory, the president argued that this is a time for unprecedented government action—in the form of high levels of government deficit spending intended to prime the economic pump—to compensate for the serious and still worsening contraction in the private sector. As a sobering counter-example of what might happen here in if we fail to act, he invoked Japan's "lost decade" of stagnation and decline in the 1990s and warned that a failure to move boldly and quickly "could turn a crisis into a catastrophe."

Strong words from a sitting president, but the public has Obama's back on this. Aside from hardcore free marketeers, Obama has broad support for this stimulus-focused approach from the public at large, and even from fiscally conservative editorial boards like the Seattle Times, which recently opined that the stimulus package is "costly, but a necessary eviland that nearly doubling the federal education budget via the stimulus package is "wholly appropriate."

So far, so good. But there's a problem, and it is a big one: At the state level, we are on the brink of adopting fiscal policies that will undercut, and may sink entirely, the pump-priming effort originating in the other Washington.

The governor, egged on by many of the very same editorialists that support the federal stimulus package, is poised to tackle the state's looming $6 billion (and likely to rise) biennial projected budget deficit solely through brutal spending cuts that in the aggregate amount to a massive anti-stimulus. In other words, what Obama giveth in terms of jump-starting the economy, the state is poised to taketh away.

The Seattle Times calls its advice for the governor fiscal discipline and says elected leaders in Olympia have no choice. But the Times ed board, which enthusiastically backed Republican gubernatorial candidate Dino Rossi in 2004 and again in 2008, has long been an uncritical megaphone for economically unsophisticated Republican talking points on economic issues (no new taxes, government spending is out of control, etc. etc.) And, moreover, their position of power as the state’s largest and most influential newspaper is a big part of the reason that, during the last campaign, Governor Gregoire boxed herself in with a “no new taxes” pledge—one that, if honored, could have a devastating impact on the state economy.

An all-cuts budget that slashed $7 billion or even $8 billion in state spending (a new revenue forecast is due in March) is actually the height of fiscal folly. And it is not just counter-productive, it is unnecessary. Think of it this way: If it makes sense for the federal government to run large short-term deficits to stimulate the economy —and it does—why is the same not true for the state of Washington?

The answer is that it is, and there is nothing stopping Washington State from taking a stimulative approach to state budgeting; nothing, that is, except lack of political will. In early December, Andrew Garber of the Seattle Times wrote a story that pointed out that, contrary to the widespread perception in Olympia, there is no requirement that the state budget be balanced.

The governor and the legislature could choose to borrow over the next biennium, to the tune of perhaps $1 billion (there is a constitutional limit to the level of debt the state is allowed). In fact, the state routinely borrows for capital projects, and during the 2003 recession borrowed $450 million from the state's portion of the tobacco settlement to help cover the resulting budget shortfall. A billion dollars now in spending could make a real difference in keeping our state economy from imploding, but could be repaid relatively easily once the economy recovers (given that state spending in the next biennium is likely to top $40 billion).

More recently, as Josh reported, a group of respected academics met with the state Senate Democratic leadership to urge them to consider the deficit option, for exactly the same reason that prominent national economists have been urging the White House and Congress to not worry about short-term trillion-dollar-plus federal deficits when crafting the federal stimulus proposal—in an economy on the brink, timely government spending may be the only route to staving off collapse.

Drawing on the assessment of Nobel Prize-winning economist (and New York Times op-ed columnist) Paul Krugman, the director of the Center for Labor Studies at the University of Washington, James Gregory, informed the Senate Ds that “50 Herbert Hoover budgets are now being written in state capitals and if they go into effect they will undermine attempts to revive the economy.” And Dick Startz, a professor of economics at the UW, estimated that 15,000 jobs would be saved for each billion in state deficit spending. “The economic argument for deficit spending during this emergency is overwhelming,” he wrote in an accompanying analysis.

But the pleas from economic experts—and Obama's arguments—appear to be falling on deaf ears in Olympia. There has been almost no public discussion of the potential economic benefit of state deficit spending in the upcoming biennium, apparently because the powers that be appear to have rejected the idea out hand. In Garber's story, the governor's budget director, Victor Moore, said flatly that deficit spending "is not good fiscal policy." Then-state treasurer Mike Murphy also argued that deficit spending over the next biennium is a bad idea, stating that it would amount to "borrowing money to buy groceries and pay the light bill. That's not good public policy."

Really? Even if the alternative is starving to death in a cold, dark apartment because you're short of cash this month? And if state deficit spending is "not good fiscal policy" even during a time of profound economic crisis, then do Murphy, Moore and Olympia electeds think it's a bad idea for the federal government to borrow billions to give to the states, as the federal stimulus package envisions?

Of course they don't. We desperately need the money in the federal stimulus package, which will be injected into the state economy through Medicaid disbursements, extended unemployment benefits, capital spending on shovel-ready projects, and so on. But if the state then turns around and adopts a radically de-stimulative fiscal policy built solely on deep state government spending cuts, then where's the net stimulus?

There are only three ways for the state to deal with its budget problem: Cut spending, raise taxes, or borrow. At a time like this, a truly sound fiscal policy would use all three. Significant cuts are unavoidable given the severity of the budget crisis, but lawmakers need to think of themselves as surgeons rather than butchers. They can accomplish that by pairing those cuts with reasonable revenue increases (extending the sales tax to services, for instance) and with a thoughtful approach to short-term deficit spending.

The real impediment to using deficit spending as a powerful tool in the state's budgetary arsenal is not that a temporary state general fund deficit would be poor fiscal policy. It is more a question of psychology, and of politics. Olympia has traditionally balanced its budgets every biennium as part of the ordinary course of doing the state's business, and those long-established habits are not easy to break. I know, it’s hardly a newsflash: Olympia is resistant to change! But as the president said on Tuesday, this is not a time for business as usual—extraordinary times call for extraordinary measures.

And Democratic elected officials are no doubt fearful—not without reason— of being branded as fiscally incontinent were they to put forward an unbalanced budget. Ossified thinking is a malady not limited to lawmakers; opinion leaders among the civic burgher class tend to suffer from it too. As I mentioned above, the very same editorial boards that approve of stimulative short-term federal deficit spending are full of praise for an all-cuts approach to state budgeting (without so much as acknowledging the contradiction). That strikes me as a reflection of the too often sclerotic groupthink emanating from the cautious, clubby echo chamber of City Club forums, Rotary Club luncheons and Chamber of Commerce board meetings.

When it comes to the economy, the situation is plenty bad now, but the really scary thing is that it could easily become much, much worse. It's time to think big, and think differently. Barack Obama gets that, but so far it's not clear that our state budget—and editorial—writers do.
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