Could Albany be bleeding the economy dry just as President-elect Obama tries to inject fresh blood?
Yesterday, New York Times columnist Paul Krugman joined the growing chorus of economists warning that Obama's much-needed economic stimulus measures could be partially undone if America's Governors cut their way out of their state's budget gaps:
…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.
Think about it: is America - not state governments, but the nation as a whole - less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago? Of course not. Our capacity hasn't been diminished; our workers haven't lost their skills; our technological know-how is intact. Why can't we keep doing good things?
It's
true that the economy is currently shrinking. But that's the result of
a slump in private spending. It makes no sense to add to the problem by
cutting public spending, too.
Meanwhile, nationally syndicated columnist David Sirota singled out New York's Governor Paterson this week for refusing to consider raising taxes on millionaires to help balance the budget:
…Having halved its top tax rate over the last three decades, New York today faces a $15.4 billion deficit.
In response, Gov. David Paterson (D) might have asked his state's
Gordon Gekkos to pay higher taxes, especially considering the idea's
popularity in polls and the news that Wall Street's elite are still
swimming in money. Indeed, according to CBS News, the allegedly
beleaguered financial industry is so flush with cash it plans to dole
out $14 billion in executive bonuses this year.
Yet, far from forcing robber barons to pay their fair share, Paterson
told The New York Times that taxing millionaires is "the last place you
want to go." Instead, he proposes to punish Joe and Jane Six-Pack by
hiking the taxes and cutting the programs that disproportionately
impact them.
Sirota and Krugman join hundreds of New York economists led by the Fiscal Policy Institute, who wrote to Governor Paterson on December 13 with the same message: steep budget cuts aren't just unfair to working families, they could be economically disastrous as the state tries to recover from the nationwide recession:
We are concerned…that steep state budget cuts will exacerbate the economic downturn and harm vulnerable low- and moderate-income New Yorkers. Constrained by a balanced budget imperative, states face only difficult choices in balancing their budgets during recessions. Economic theory and historical experience gives a clear and unambiguous answer: it is economically preferable to raise taxes on those with high incomes than to cut state expenditures.
The reasoning is straightforward: in a recession, you want to raise (or not decrease) the level of total spending-by households, businesses and government-in the economy. That keeps people employed and buying things, and makes it more likely that businesses will want to invest to serve that consumer demand. Budget cuts reduce the level of total spending. Raising taxes on high income households also will reduce spending, but by much less than the amount of the tax increase since those with plenty of income typically spend only a fraction of their income.
By contrast, almost every dollar of state and local government spending on transfer payments to the needy and for the salaries of public servants providing vital services to our communities enters the local economy right away, generating a greater economic impact. The New York local spending impact difference is even greater when you consider that much of the higher state income tax will be deductible against federal income taxes, and that non-residents who commute to high-paying jobs in New York will pay much of the increase.
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