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The Mistake of the Mini-Stimulus

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While the calm the snow has brought to New York's streets is eerily pleasant, the calm it has brought to Washington is unsettling. Though Senator Reid has pledged to remain on Capitol Hill to hash out agreement on a jobs bill, momentum for a bill that would significantly impact unemployment is waning. The proposal has been whittled from the, in retrospect, quite ambitious House plan for $174 billion in spending on infrastructure, education jobs, and six-month extensions of unemployment and COBRA benefits to a slew of tax credits, an extension of a subsidized bond to finance infrastructure project, and three-month extensions of unemployment and COBRA benefits.

Direct spending on infrastructure projects seems to have been dropped and there has been no mention of aid to states or cities, which provided one of the most effective boosts to employment in the last year. Plus, like a second blizzard within a week, Senators are trying to add insult to injury by including in the legislation a reduction of the estate tax in 2011 and reauthorization of the Patriot Act.

The jobs bill now looks similar to many of the "mini-stimuluses" that states have passed over the last year. According to the National Conference of State Legislatures, 11 states have authorized mini-stimulus plans, which are mostly tax incentives, loans, a fair amount of "regulatory reform" to "ease the burden" on job creation, and lots of incentives to "encourage" this or that activity that supposedly generates job growth. Only half of the 11 states have devoted funds to infrastructure projects.

The mini-stimulus bills are generally characterized by their lack of ambition. Enacted state-level stimulus and jobs packages total $35 billion with stimulus spending proposed by all states adding up to only $39 billion. At $31 billion, Illinois's capital construction plan (its first in a decade) constitutes fully 89% of state-level spending on stimulus.

The catch, of course, is that states are hamstrung by budget rules about how they can deficit spend (they generally can't, though borrowing is permitted for certain functions, like infrastructure projects). These mini-stimulus bills might assist individuals on the margins and might speed up investment and even some job creation. But they are more often efforts by governors and state legislatures to demonstrate to their populations that they are concerned with the economy and with unemployment. After all, as Paul Krugman noted a while back, it doesn't really make sense for states to pursue economic stimulus strategies:

think of what would happen if, say, New Jersey were to attempt to boost its economy through tax cuts or public works, without this state-level stimulus being part of a nationwide program. Clearly, much of the stimulus would "leak" away to neighboring states, so that New Jersey would end up with all of the debt while other states got many if not most of the jobs.

The lesson is that governors and state legislatures can generally be excused for trying to stimulate their economies with underwhelming measures. State and local governments serve other vital roles during downturns, ranging from service provision to facilitation of federal stimulus efforts. For instance, a mini-stimulus introduced by California State Senator Darrell Steinberg would, according to the State Senator, create 140,000 jobs, but more than 80 percent of these jobs would be created by ensuring that federal funds are invested "efficiently and quickly."

The federal government, on the other hand, is both privileged and cursed with the capacity to impact -- to actually stimulate -- the economy. A federal "jobs bill" that is more reminiscent of a state-level mini-stimulus package would just be election-year white noise.