Spend Now, Save Later

After the fun and games of a stimulus bump, stringency lies ahead.
March 1, 2009 AT 3:00 AM
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

As a sector of the economy, state and local government is relatively dull: no exhilarating surges in profits; no exciting run-ups in stock prices. But what the sector lacks in sparkle it makes up in sheer heft (15 percent of the national economy) and scope (87,000 governments). In normal times, the state and local sector plods along, acting as an economic stabilizer. When times get tough, though, the opposite occurs: Governments cut spending and that can further depress the economy.

The current policy prescription is to spend ourselves out of a deepening recession. The federal recovery package is aimed at rolling money into the economy and creating jobs. This is good news for states and localities. Governors and mayors have their hats outstretched to snag federal dollars. At the same time, it's critical that they not lose sight of certain realities: Stimulus money is short-term; long-term fiscal problems lie ahead. So, while the immediate mission is to spend fast and get more people working, this needs to be done in ways that will prepare for a stringent approach to budgets and taxation in the not very distant future. To promote that process, I have some suggestions.

First, spend the stimulus money, but don't build it into operating budgets. That means spending on capital improvements and assistance programs that can disappear once the federal money does. This is the time to employ temporary workers and hire private-sector contactors. It's also the time to move some spending commitments onto temporary-funding status with the intent to cut them when times improve.

Second, spending cutbacks should be both surgical and widespread. That may sound like a contradiction, but selective spending cuts can be made where programs are of marginal value and public support is weak. Spreading the pain is necessary, too, and is an ingredient for achieving future frugality. Payrolls dominate public spending, and large, systemic deficits can be reduced by tightly controlling the labor bill. Many states and localities are now reducing spending by handing out furloughs. Just having a regular job with benefits is a real plum these days and needs to be valued as such.

Third, look over the horizon: This recession should spotlight the fiscal limitations of government and provide an opportunity to make long-term reforms. Sentencing standards and prison costs should top the list, along with realistic rationing of government-supported health-care benefits. Pension and post-retirement benefits need to be sustainable. Arcane and inequitable practices, such as the gratuitous distribution of disability benefits, should be examined. Local government structure, which is a legacy of a bygone era, should be remolded, much as we did with the consolidation of school districts in the post-World War II era.

Last, education spending should not be sheltered from the rigors of tough times.This recession will be a valuable lesson for today's children, as the depression was for an older generation. There are times when a "free" people must forego individual pleasures and prerogatives in order to achieve collective goals. That is a real-life civics lesson.