Economic Development

Stimulus Results: Difficult to Pin Down

Suppose you're a state budget director and you started this year looking at a huge fiscal shortfall (as virtually all of them did). It seemed...
by | September 30, 2009

Suppose you're a state budget director and you started this year looking at a huge fiscal shortfall (as virtually all of them did). It seemed inevitable that you'd have to cut workers from the state payroll--perhaps thousands of them. But you never put a precise number on it. Then the federal stimulus money showed up and it turned out you barely had to lay off anyone at all. That was undeniably good news. However, it raises a difficult question. Just how many jobs in your state did the stimulus actually save? There's no real way to be sure. Says Don Elliman, who is overseeing the stimulus funds in Colorado, "We don't know what programs we would have cut if we hadn't had the money."

In Colorado, as in most states, one of the first effects of the stimulus has been to bolster beleaguered balance sheets. This spring, state after state considered painful spending cuts and tax increases, and those moves would have been much more drastic had Congress not directed billions of dollars to state treasuries. Without the stimulus, Colorado might have cut millions from schools or health care or some other category of state spending. But lawmakers never had to decide.

That represents a conundrum for Elliman and for all state stimulus managers, because their responsibility is to calculate just how many jobs the stimulus program is saving or creating. It's also a conundrum for anyone wading into the politically charged question of whether the $787 billion American Recovery and Reinvestment Act was worth the money. When judging the stimulus, the fundamental question is one that nobody can confidently answer: How would the situation be different had there been no stimulus at all?

Despite the uncertainty, states will provide an accounting of sorts on October 10, when their first quarterly reports are due. Leading up to the deadline, they're already offering informal assessments of what has happened so far. Most of them report that the state-administered social safety net has been bolstered at a critical time. Money also is flowing to projects that can start quickly--road repaving is more common than massive new infrastructure efforts. And while new job creation is limited, many workers who might have joined the ranks of the unemployed--especially school employees--are still at work.

But the apparent successes raise some big questions. Perhaps the biggest is this: Are states, by relying on one-time funding to balance their budgets, merely pushing cutbacks and economic pain into the future?

The federal government hasn't always counted on the states to administer economic relief. During the Great Depression, when the Roosevelt administration wanted to pump money into the economy, it created new federal agencies, such as the Works Progress Administration and the Civilian Conservation Corps. This time, there are no such agencies.

The stimulus included $499 billion in spending and $288 billion in tax cuts. Of the spending portion, $280 billion--more than half--is being administered by states and localities. And the states have more say than the locals: They do most of the communicating with Washington.

In effect, the federal government outsourced to the states the job of spending hundreds of billions of dollars quickly, efficiently and wisely. So it's reasonable, if not imperative, to ask what the states have been doing with all the money.

The answers so far aren't what you might expect. It was widely perceived at the beginning of the year that the stimulus was designed to be mostly a building program like the WPA. But the central focus isn't construction. It's health care. Of the stimulus money that made it into budgets for the 2009 fiscal year, 63 percent of the funds were used for Medicaid.

Medicaid isn't the only social service program that has benefited. Some of the simplest, quickest parts of the stimulus to implement have been expansions in unemployment benefits and food stamps. "The short-term impact that is most important right now," says Leslee Fritz, who oversees the stimulus money in Michigan, "is the social safety net protection."

In many places, stimulus funding has provided a safety net for overall state budgets. While most of the money states are receiving is targeted to specific purposes, some of it is fungible, and helped bring budgets closer to balance this spring. That kept large numbers of people employed, although, as Colorado's Don Elliman says, it's impossible to know the exact number.

This isn't contrary to the plan's original intent. If the headline of the stimulus was President Obama's promise of 3.5 million jobs over two years, the fine print was that he was talking about jobs created or saved. As Elliman says, "a job retained has exactly the same value as a job created."

With safety-net money flowing, the next big question is whether states will be able to spend the rest of the money--much of it for roads and bridges, health information technology, energy efficiency and public transportation--quickly enough to make a dent in the recession. When it comes to the $27 billion or so for roads and bridges, states have been taking the approach that it's better to start small.

That's why the first batch of bridge and highway money went disproportionately to road resurfacing--66 percent of highway projects obligated by July were for repaving or pavement widening. Paving jobs aren't sexy, but they are easy to start up quickly. And it's turning out that this money is going further than many expected. States with the worst economic climates are finding contractors desperate for work who are bidding as much as 20 percent less than projected. As required under the law, every state obligated at least half of its highway dollars by June 29.

While a great deal of scrutiny has centered on whether states are moving too slowly, some of them are complaining that the feds are pushing them too fast. This summer, it was reported that Florida ranked last in the amount of highway stimulus money spent, leading a key Democratic congressman to criticize state government. Florida officials responded that they didn't want to spend their money on make-work repaving jobs and instead preferred to get going on the larger, more economically transformative projects that can take a bit longer to get started. Congress, they say, is pushing them to move faster than is prudent.

Almost every state has some complaint about federal management of the stimulus. New Mexico, for example, spent weeks preparing to apply for competitive grants for broadband access, only to see the federal guidelines render its work largely useless. Still, the overall picture coming from states is that the federal government has been responsive in getting the stimulus going. Tom Hanson is Minnesota's stimulus manager. His boss, Republican Governor Tim Pawlenty, is a stimulus critic. But Hanson has kind words for the Obama administration nevertheless. "I marvel," he says, "at what they have accomplished since January."

In the end, though, the crucial question is whether all of this activity is worth $787 billion.

The theory behind the stimulus was that a dollar spent on unemployment benefits will travel from the recipient to, for example, a grocery store. The store owner can use the dollar to stock his shelves with a can of beans. When the dollars start adding up, that's a lot more business for farmers, canners and truck drivers. In other words, the stimulus was predicated on the Keynesian notion of multiplier effects--one dollar of government spending can produce more than a dollar's worth of economic activity. Trying to calculate these multiplier effects is a challenge for economists. It can be almost impossible for state governments.

Conservative economists tend to be skeptical of multipliers. They argue that every dollar of government spending adds a dollar to the deficit. Larger deficits, they say, will one day force tax increases, hurting the economy in the future. Deficits could even hurt in the short run, the argument goes, if consumers anticipate future tax increases and save rather than spend.

Liberal economists see it differently. They view new spending--especially the safety-net spending that has been the early emphasis in the states--as a way not only to ease the effects of the recession but also to get money circulating quickly in the private economy. The worst contributor to the deficit, they argue, wouldn't be short-term spending, but rather a long recession that would stifle economic growth.

There's no simple way to say which side is right. Unemployment has in fact increased since the stimulus passed, while unemployment filing has declined. But, as Elliman discovered in Colorado, the proper comparison isn't between February and today. It's between what has happened with the stimulus and what might have happened without it. Nigel Gault, chief U.S. economist at IHS Global Insight, wonders what consumer confidence or interest rates would have been in the absence of a stimulus. "I can say pretty confidently," Gault says, "that we'll never know."

One focus for this clash of ideologies is the aid that went directly to state treasuries. Critics say government was the last economic sector that needed a boost. "The 50 most skilled welfare recipients in the country," says Peter Morici, a University of Maryland economist, "are the 50 governors."

Many economists, however, note that fiscally strapped states nearly always make recessions worse because they are required to balance their budgets. To do this, they raise taxes and cut spending precisely when those actions are most harmful to the economy. The liberal Center on Budget and Policy Priorities estimates state budget shortfalls of $350 billion for the 2010 and 2011 fiscal years, more than the total amount of stimulus money states are receiving. From its standpoint, the stimulus, while not covering the entirety of shortfalls, is muting the tendency of states to make a recession last longer.

Even if a formula for answering the difficult questions about job savings could somehow be invented, it would still be far too early for any general assessment of the stimulus. The money was purposely split up over multiple years, since the Obama administration judged the economy would remain weak for a long time. Nonetheless, questions about the Recovery Act's long-term impact are coming into focus.

There's a risk that all of the help Congress has given the states will come with a disturbing legacy. By using federal money to help balance their budgets, states may simply have deferred the economic pain of deeper spending reductions to a future year. When the stimulus dries up, they may have to make cuts so dramatic as to deliver a body blow to a still-fragile economy.

On this count, states know they need to be careful. When they can, they're using stimulus money for temporary expenses instead of recurring ones. In many cases, though, that's not possible. When stimulus money is used to avert teacher layoffs, for example, the question is what happens to those employees in two years. What's more, the law includes "maintenance of effort" requirements in key areas such as public education that have locked in spending at pre-recession levels. The safety-net funding for Medicaid, unemployment insurance and food stamps requires a relatively high floor for benefits and relatively lenient eligibility rules.

So, is the safety-net spending sustainable? "That's not even a question," says South Carolina Comptroller General Richard Eckstrom. "So much of that spending is financed by the stimulus act now, that once it goes away, we're sunk."

The hope, of course, is that the economy will rebound, tax revenues will skyrocket and state budget cuts in 2011 will be milder than anticipated. Under that scenario, states and the economy will have benefited enormously from avoiding huge cuts this year. But right now, projections still show large shortfalls for 2011.

Nor does anyone know what the broader impact of the stimulus will be on American society in decades to come. Chris Whatley, of the Council of State Governments, notes that the effects of Depression-era programs can still be seen today. For example, the San Antonio River Walk, a focal point of downtown and a key tourist attraction, was created through WPA funding. With states rushing to spend quickly and with money spread so widely, it's not clear that this stimulus will have the same lasting legacy. "While millions of people visit the River Walk," Whatley says, "millions of people will never visit the repaving of the Pennsylvania Turnpike."

Most state officials insist, however, that it's too early to make that sort of judgment. Much of the stimulus money that carries the most transformative potential is in the form of competition-based grants for energy efficiency, education reform, health IT, broadband access and high-speed rail--things that might change a state or city in dramatic ways. This money is being disbursed more slowly than other parts of the stimulus, since applicants have to make their case to the feds.

If you want to see what states might be able to do with the stimulus, though, a good place to look is Michigan. The law included $2.4 billion in grants for research into electric car batteries. Thanks to a concerted effort from the state, $1.3 billion of that money went to Michigan recipients. As of now, most electric batteries are produced overseas. With this seed money, Michigan might someday become the center of a whole new automobile economy.

Or, it might not. By the time anyone knows for sure, the political fight over the stimulus will be old news and the economy will probably have gone through a whole new cycle of boom and bust.

Josh Goodman
Josh Goodman  |  Former Staff Writer
mailbox@governing.com

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