When the Well Runs Dry

The stimulus won't last forever. That's worth remembering.
May 1, 2009 AT 3:00 AM
Peter Harkness
By Peter Harkness  |  Founder, Publisher Emeritus

Sarah Palin says she will turn down close to one-third of the stimulus cash being offered to her state. She says she wants to limit the use of the money to creating jobs in construction, and not use it for day-to-day government operations. It's a daring move, not only because of the amount she's turning down--almost $300 million in a state with a tiny population--but because of what it could buy. Close to half of what's on the Palin reject list is funding for education: money for new preschools, programs for poor kids and special-needs students. These are popular programs, and Palin knows that the legislature may override her and accept all, or at least most, of the money. That's if the courts permit legislatures to circumvent their governors, which right now is up in the air.

Palin's argument is a broader version of one that other Republican governors, led by South Carolina's Mark Sanford, have been making. All of them have been accused of playing partisan politics, perhaps with justification, but the argument is worth listening to. Essentially, it says that it's a mistake to accept any federal stimulus money that obligates them to continue the spending when the federal pipeline runs dry in two years or so. Sanford and some of his GOP counterparts have focused on money to expand unemployment benefits, insisting that their states and businesses will have to pay the bill for the expansion after the federal funding flow is over.

Palin is taking the issue further, but she's making the same case. It's an argument that was put rather colorfully not long ago by one of Alaska's Republican state senators, Con Bunde. He says the stimulus offer "is a little bit like having way too much to drink. A good time may be had by all, but the hangover the next day, and the consequences of what you did while you were drunk, may be with you for a long, long time."

Using less colorful language than Bunde, economists tend to agree with this. They warn that the stimulus package is temporary, and if the recovery doesn't come fairly soon, governors and mayors will be facing an even more serious crisis in two years than they're coping with now. The Rockefeller Institute of Government, which does a better job of covering state fiscal trends than just about anyone, reports that if the recovery follows the pattern of some past recessions, then in 2012, states could be facing a 4 percent shortfall in general expenditures--roughly $70 billion altogether. Or more likely, it could be a 6 percent shortfall, or $100 billion.

State revenues tend to bounce back in different ways following an economic downturn, sometimes quickly, as in the so-called V-shaped recessions of 1981 and 2001, and sometimes very slowly. In the downturn of the early 1990s, it took five years for state tax revenues to return to where they had been when the recession began. And that's worrisome, because that recession, like this one, was financial in nature, a product of the late-1980s savings and loan failures.

It's hard to figure how this recession will compare. What we do know, according to the Rockefeller analysis, is that the "federal stimulus package is assumed to be used by the states almost entirely for fiscal relief rather than to support new programs .... If states use more of the aid for new programs, larger cuts in other spending or greater tax increases would be needed after the money runs out."

With that in mind, Palin's stand does not seem unreasonable. Why start up a bunch of preschool programs knowing that in two years or so there's a very good chance you'll have to close them down? Saving jobs makes sense; creating new long-term programs doesn't.

Of course, a lot of this can be written off as political posturing. Palin and Sanford, along with governors Bobby Jindal of Louisiana and Tim Pawlenty of Minnesota, are aspirants to the GOP presidential nomination in 2012, and want to establish their partisan credentials by challenging the Democratic administration in Washington. What's more, they can turn down the money with some confidence that their legislatures will overrule them and their states will get the funding anyway. Sanford has made it clear he thinks the legislature will end-run him and take the unemployment money. Now, Jindal is saying he might accept the funding because when it runs out, the state can always repeal the law by which it was accepted. And Palin says she doesn't mind if the legislature accepts some or all of the stimulus. She just won't request it.

You can call that tricky politics if you like. But being careful about digging your state into a deeper economic hole is pretty sensible economics, as well.

Peter Harkness
Peter Harkness | Founder, Publisher Emeritus | pharkness@governing.com