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State relief package: It's a floor wax AND a dessert topping!

The Washington Post, August 11, 2010

Remember (if you're a certain age) that great Saturday Night Live ad parody in which Chevy Chase chirps to spatting spouses Gilda Radner and Dan Aykroyd that "New Shimmer is a floor wax AND a dessert topping!"?

Well, the $26 billion state relief package just passed on party-line votes is the same kind of zany paradox: a crucial step to ease today's economic pain AND a dastardly bailout. That's right, kids—it's indispensable AND indefensible!

Welcome to another truth too subtle for our political culture to process intelligently. In Washington, and in the posing that passes for "debate" on TV, the $26 billion is cast as either nirvana or apocalypse.

But if you're not blinded by partisanship, a few things are clear. As a matter of macroeconomics, the big (if imperfect) federal stimulus has been partly stymied by a huge "anti-stimulus" at the state level. Big holes have been blown in state budgets, with revenue collapsing as the economy sank. Since states by law have to balance their budgets, they're forced to slash spending and raise taxes, further crimping local economies at the worst possible time. These state cutbacks cancel out the stimulative effect of deficits being run by the feds.

With state budget gaps this year slated to soar as high as $140 billion, $26 billion is thin gruel. Even the $50 billion the president wanted would only have made the vast anti-stimulus a third smaller. It's another tale of Democratic aspirations falling far short of the magnitude of the problem.

In an ideal world, would we want Uncle Sam to keep borrowing billions from China to ship to states to help them avoid hundreds of thousands of teacher, cop and firefighter layoffs? Of course not. But we're not in an ideal world. We're in a jobs crisis, with a Federal Reserve that's out of traditional ammunition, and we need to use fiscal policy on an emergency basis to keep the raft of the economy from sinking back under the waves. (Plainly it's a metaphor crisis as well.)

It's the same logic of pragmatic crisis management that produced the auto bailout—action that, with GM set to post its biggest profits in six years, looks to have been a success, even as it spared the fragile Midwest economy from sudden, untold job losses if the carmakers and their suppliers had been left for dead.

So much for the Democratic dessert topping. But Republicans are right to see the floor wax. The auto emergency offers the right template—because the industry was forced to restructure as a condition of its bailout. The states haven't been. Borrowing from China to skirt devastating state layoffs is one thing. But borrowing from China to keep runaway Medicaid programs in New York and California free from fundamental overhaul, and gargantuan unfunded public pensions untouched, seems mad. In California, more money is spent each year on compensation and pensions for 70,000 prison employees than on the state's entire higher education system! The conspiracy-minded might view China's lending here as a shrewd Manchurian-candidate-style fiscal assault meant to slowly sap our strength.

The tragedy is that it is not beyond the mind of man to structure a state bailout that does what we need. States would be eligible for far more near-term relief than Democrats just offered in direct proportion to the amount they reduce their long-term unfunded liabilities in pensions and health care. It's just that our current byzantine tangle of interest groups, campaign funding and media habits, mixed with both political parties' fears and ambitions, conspire to ban even the expression of this kind of idea, let alone its enactment. It's another depressing example of how unequal our political institutions have become to the substantive challenges we face.

Nor would it be hard to design an ambitious new stimulus that goes beyond these state bailouts that could make a big difference fast. As I've argued before, we could enact big payroll and corporate tax cuts now, offset (and then some) by new energy and consumption taxes passed today but taking effect only once unemployment is below, say, 6 percent. This tax swap, which could appeal to liberals and conservatives, would provide a much-needed jolt to business's "animal spirits" while assuring bond markets we're serious about getting our house in order in due course.

Instead, we've got the $26 billion blues, the perfect emblem of American pseudo-solutions circa 2010. A scheme that, in the end, offers none of the magical properties of New Shimmer, "the greatest shine you ever tasted."