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Will the Governor's Cuts Hinder Minnesota's Recovery?

June 17, 2009 By Lee Egerstrom, Economic Development Fellow
Governor Pawlenty has now used executive authority to cut vital state investments to balance an out of whack state budget. This comes as communities get whacked with another $300 million in cuts. Local governments will likely begin eliminating local employment and services soon.

These actions occur at the same time President Obama and Vice President Biden are on the road jawboning state and local governments to do their part to bolster economic  recovery. Specifically, the national leaders want state and local governments to quickly get federal recovery aid into the economy to strengthen employment and put the brakes on the recession.

What one hand giveth, the other taketh away, so the old saying goes. And it begs the question: does one hand know what the other hand is doing?

It doesn't appear so. What federal policy makers call "stimulus" funding, state policy makers seize as substitution funding.

One glaring example is how the state is cutting support for higher education while the University of Minnesota and Minnesota State Colleges and Universities (MnSCU) systems are using federal funds to hold programs and faculties together for the coming year - with no hint of what they'll do another year out. Despite this temporary use of funds by higher education, the Governor's cuts will lead to deep staff cuts.

About the only state and local use of federal funds clearly compatible with national objectives are road building and transportation infrastructure investments. These investments are putting people to work now to produce a common good that will serve us over time.

Public Lag Time
Leaders at the federal and at state and local levels do appear to be talking past each other, not connecting on what needs to be done to turn the economy around. Unfortunately, this isn't a new phenomenon; rather, it is historical.

There has always been a lag time in public recognition of economic circumstances whether responding to economic crisis or merely maintaining ongoing government services.

Bob Bergland, U.S. Secretary of Agriculture in the Carter administration, told reporters of his frustrations while engaged in writing a new federal farm program while he was a Minnesota congressman in the early 1970s. Congress would hold hearings, he said, that revealed what the farm economy and global market conditions were the previous year. Then, Congress would write a new program that would begin the following year.

That meant the new farm program was almost always based on farm and market economic conditions that were often two to three years out of date, he said.

So it goes for federal recovery efforts as well. Bruce Bartlett, a former Treasury Department official in the Reagan administration, has written for Forbes and other publications this year that government economic recovery programs in recent recessions have entered the economy after the recovery had started. He cites short-lived recessions of 1948, 1957, 1960, 1969, 1973, 1981, 1990 and 2001 as examples.

That's probably true for reasons similar to Bergland's comments about farm programs. The National Bureau of Economic Research, the private organization formed in 1920 to monitor the economy and advise governments, is never quick in declaring recessions. It only declared on Dec. 1, 2008, that the U.S. was in recession, and then said the current recession actually started in December 2007.

Federal recovery money is now arriving on the scene in what is the second calendar year of the current recession. We should be so lucky if it comes late and that a recovery is already in the works like the short-term recessions cited by Bartlett. Unfortunately, this recession looks like it's running longer and deeper, and that the $787 billion federal package is needed to keep the current down cycle from getting worse.

Given budget constraints on state and local governments, the nation is dependent on the federal government's ability to use deficit spending to stimulate the economy. But that doesn't mean state and local governments can't misuse their authority and negate the intent of federal dollars.

Five Questions for State and Local Governments
As Minnesota's governor, city mayors, council members and county commissioners sharpen knives for cutting program budgets and begin furloughing and laying off public employees, several questions should be asked up front.

First, are our actions at the state and local levels undercutting federal efforts to trigger economic recovery?

Second, will our intended use of federal recovery money create new jobs, either in the private or public sectors? At a minimum, will it maintain current levels of employment?

Third, will eliminating public service jobs do more harm to the state and local economies by causing home foreclosures, slowing retail sales, stunting other commercial activity and raising social costs? 

Fourth, if we use federal recovery money as a substitute for state and local revenue this coming year, how do we intend to maintain programs and employment beyond 2010?

Fifth, will our actions create an environment supportive of economic development in the months and years ahead?

These questions aren't easy to answer in the best of times. They at least need to be asked in times like now.

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