Understanding Government

Now here’s an example of how the Obama administration’s proposed 2010 budget can work to help people hit by the recession — the Wall Street Journal’s Janet Adamy reports that the administration will slip in an extra $25 billion to help cover the costs of state medicaid payments. With the impasse on health care reform, this was relieving news to states — many that are in recession-fueled budget deficits.

The governors got reassurance on a conference call Friday with Health and Human Services Secretary Kathleen Sebelius. She said President Barack Obama’s fiscal 2011 budget would include a six-month extension of the Medicaid funding increase that was part of last year’s stimulus package.

Without the extension, which requires congressional approval, the extra money would expire at the end of the year.

Currently, there appears to be no faction opposed to such a measure.

The move would help ease a strain on state budgets as the recession is sending more Americans into Medicaid, the health-insurance program for the poor that is jointly funded by the federal government and state governments. To cover the shortfall, governors had considered cutting education funding, reducing payments to doctors and hospitals through Medicaid, and taxing soda, candy and chewing gum.

One of the most simple and most effective policies is giving money to states to let them maintain their status quo in social services like medicaid and also to prevent layoffs of public employees like teachers and child care workers. I would also think — and I’m treading into uncertain territory here — that the simplicity of such government spending would prove politically effective. Indirect economic stimulus like renewable energy projects and tax breaks to small businesses can be attacked, because its benefits are susceptible to several variables and take longer to bear out. It’s harder, though, to come out and say you’re against government spending that gives health care to the poor and lets teachers keep their jobs. Presumably.

The Washington Post’s Peter Whoriskey looks at the crisis of state unemployment benefit funds: the majority of states have run out of money and need emergency federal assistance. Whoriskey explains that while the crisis is due to the recession, the source of the problem is not just the economy but myopic state governments:

Unemployment benefits are funded by the payroll tax on employers that is collected at a rate that is supposed to keep the funds solvent. Firms that fire lots of people are supposed to pay higher rates. The federal government pays for administrative costs, and in a recession, it pays for the extension of unemployment benefits beyond 26 weeks. But over the years, the drive to minimize state taxes on employers has reduced the funds to unsustainable levels.

“The benefits haven’t grown — that’s not the problem,” said Richard Hobbie, director of the National Association of State Workforce Agencies.

The consequences of fiscal irresponsibility at the state level are immediate: 46 states must balance their budgets, meaning that the best hope for the unemployed to collect benefits is a continued stream of “emergency” federal assistance.

The House of Representatives passed a bill yesterday that re-establishes pay-go rules, reports the Associated Press. For those uninitiated with lawmaker’s periodic zest for pay-go legislation, it means that every tax cut or spending increase must be counter-balanced by an equal spending cut or tax increase. In other words, the idea is to promote a balanced federal budget. But the federal deficit is now $1.8 trillion and even if this pay-go bill becomes law the debt should only get larger in the next few years, according to the Congressional Budget Office. Plus entitlement programs (Social Security, Medicaid, Medicare) and a re-authorization of the George W. Bush tax cuts for the rich are exempt from pay-go.

Pay-go isn’t necessarily ineffectual legislation but it underscores how much easier the federal government has it than state governments. Members of Congress have the luxury of mulling over whether they want to do something about the gap between how much revenue they get and how much they spend. State governments meanwhile must pass a balanced budget each year even during a great recession and extreme revenue shortfalls. California is ripped (and justifiably) for a $27 billion budget deficit. But that’s 1.5 percent of how much the federal debt is.-MB

Jonathan Weisman of the Wall Street Journal has a good, explanatory piece today on state budget deficits and what Washington can do about it. The vast majority of states have cut basic services from enacted budgets and about half of all states have raised taxes to deal with unprecedented deficits. Here in Illinois, as I reported in my piece on the post-Blagojevich state government, there’s a $11.5 billion deficit and Gov. Pat Quinn says the only way to balance the budget is a 50 percent across-the-board income tax increase.

The Obama administration is generous in its loans to financial firms — it has followed through on the Bush administration’s $750 billion Treasury Dept. Troubled Asset Relief Program, and it has allocated a trillion dollars  in Federal Reserve loans. But while TARP funds have been extended to auto companies and even the insurance industry, there’s no plan to use them for states. Weisman writes that another stimulus bill might be needed — the first one gave $246 billion in emergency stabilization funds to states and that clearly wasn’t enough. But with the talk in Washington centered on health care reform, the political will is probably lacking to undertake a 2nd stimulus plan.

Another solution is for the Treasury and Federal Reserve to underwrite state bond offerings, an idea championed by Barney Frank, the chairman of the House Financial Services Committee. Here again, though, is another political problem: many Republicans from the states in dire straits don’t want federal assistance. As Frank points out, the Obama administration and Democratic leadership in Congress won’t waste political capital on a California bailout if California GOP lawmakers strenuously oppose it.

The consequences of this dilemma is that with the country at its worst unemployment rate in 26 years, basic state aid programs like cash for the unemployed and community health clinics are going unfunded.-MB