Washington's New Stinginess

Jimmy Carter's chief economist, Alfred Kahn, had a habit of speaking his mind, even when his listeners didn't want to hear him. As inflation soared ever higher in the late 1970s, he warned that the high prices could bring on a recession--or perhaps even a depression.

The president's strategists, staring into a tough 1980 presidential campaign, blanched. They ordered Kahn to tone down his rhetoric. So, in his cheeky sense of humor, Kahn started calling the recession by a different word. He warned audiences that continued high inflation brought the risk of a serious "banana."

This time around, the banana word is "stimulus." President Obama's strategists are caught in a tough dilemma. The longer unemployment stays high, the more they'll own that problem. But the more they try to pump up the economy to restore jobs, the more they'll feed Republican charges of overspending and waste in the months preceding the mid-term congressional elections. Obama-ites simply don't want to use the word "stimulus" in thinking about a new round of spending to pump up the economy. So I won't use it either.

But with the job picture looking dismal and the elections looming, Team Obama has in fact cooked up a second round of banana spending. In early December, the president signed a package of bills that expanded the tax credit for first-time home buyers, extended unemployment benefits, and refunded business tax payments for companies that lost money in 2008 and 2009.

Nowhere in the banana sack, however, was there more cash for strapped state and local governments, which are struggling to cope with tsunamis of red ink for 2010 and even worse prospects for 2011. In fact, a recent study by the Rockefeller Institute of the State University of New York found that state government deficits for 2009 were equal to twice the amount of cash the federal government provided in the first stimulus program. What the feds gaveth, the sliding economy tooketh back, twice over.

Some analysts had argued that state and local governments should have been the focus of any new round of banana payments. The new money could have helped these governments plug their fiscal leaks, and this in turn might have allowed them to pump money out fast to programs targeting the poor, such as Medicaid.

But the Obama administration not only faced a rising chorus of complaints from Republicans--it was looking at some truly frightening long-range deficit forecasts. It wanted to stimulate the economy but to do so in a bulletproof way. A new bill with more funding for state and local governments would have forced prolonged debate and controversy. So the second banana focused on popular but targeted projects that benefited the unemployed directly and assuaged important interest groups.

There was a time, of course, when state and local governments were big players in the interest-group scramble. But it was quite a while ago. To find an administration that was truly sympathetic to state and local pleas for cash, you have to go back to the Nixon era. In the early 1970s, state and local governments benefited financially from the sense that the federal government needed to keep them on course. Urban renewal and community development grants, along with a vast array of programs ranging from Medicaid to education, flowed down from Washington because of a sense that the states and cities couldn't manage their burdens on their own.

After that, though, money got tighter and federal attention to state and local issues began evaporating. Meanwhile, state and local governments became more sophisticated and professional. By the time David Osborne celebrated governors with his 1988 book, Laboratories of Democracy, many states and cities stood toe-to-toe with the federal government on domestic policy. Innovations in welfare and environmental protection bubbled up to Washington from the grassroots, not the other way around. The days when everyone looked to the federal government because the states and cities couldn't be trusted were finally over. State and local governments had made the transition from needy children to independent partners, from grant-seeking claimants to allies in governance. And so their role as powerful interest groups in Washington gradually gave way to the ever-increasing influence of lobbyists for corporate America. The more competent and creative a state or city became at home, the weaker it seemed to become in Washington.

These governments have rightly celebrated their progress. However, when the economic bottom fell out last year, they still had to balance their budgets, often using outdated tax systems, while the feds could tap into almost limitless borrowing to finance their spending--until they were confronted by resurgent Republicans and worried budget forecasters. Except for a short-term Medicaid boost that may come with a health care reform bill, the bananas have run out for states and locals just at the time they need help the most.

No one would want to go back to the bad old days, when federalism was largely a game of figuring out how the feds ought to drive domestic policy. But state and local governments have to confront the fact that the White House is now more interested in transparency and inclusion than in aiding their state and local partners. States and cities want more bananas but the shifting game has them slipping on the peel.