THE BLOG
04/10/2010 05:12 am ET Updated May 25, 2011

States Can Pick Up the Stimulus Slack

The recession has surely proved a windfall for Chicago's psychotherapists: As even some prominent Friedman disciples break from the ranks of free market absolutists, couples' therapy must be at a particular premium, with the need to sort out so many newly strained relationships among former partners in the doctrinaire. We're (nearly) all Keynesians now. At least in theory.

But as happens with tragic frequency in the field of economics, what looks good on paper isn't manifesting itself in the real world. It's not that the ideas are wrong this time -- Washington just can't manage to put them to work. Many state governments, however, ought to be able to pick up the slack.

We've spent $700 billion bailing out Wall Street. We've seen the enactment of a $787 billion stimulus bill -- nearly $300 billion of which comprised tax cuts. Much of it went to worthy programs, like health care and public education, but only about $80 billion of was designated directly for much-needed infrastructure improvements.

We're doing deficit spending, but the federal government has proved anemic at creating the sort of jobs-spurring, capacity-building, growth-inducing, public works stimulus that once won us civic monuments, highways, and city streets and sidewalks, and helped millions of Americans survive the Great Depression. On a per capita basis, Roosevelt's stimulus saw us spending nearly seven times more on infrastructure projects than has Obama's. (This is the incremental stimulus spending -- there's admittedly a higher baseline of government spending now than there was in the 1930s.)

Leaning on Okun's Law, which relates unemployment to changes in GDP, many economists have argued convincingly that the government should have passed a stimulus twice as large as last winter's American Recovery and Reinvestment Act.

There are countless reasons for the Federal logjam -- some tactical, some structural. But where the Federal government has failed, the states can make up part of the difference. With the exception of Vermont, state constitutions and laws prohibit traditional deficit spending -- states can't pass budgets in which spending exceeds revenues in a given fiscal cycle. But they can do precisely what we need most: put bond measures on ballots that would create capacity-building, capital projects and put people to work. That means grants and low-interest loans in support of roads, bridges, and public transit, easier credit for small businesses, funds for businesses and residents to undertake renewable energy, energy efficiency, and weatherization projects.

The endeavor might require a few crash courses in economics. State leaders are not used to creating their own stimulus packages; recessions create pressure on states to take measures that actually risk exacerbating economic contractions. Nobody wants to raise taxes in a downturn, but states can't engage in traditional deficit spending. So when revenues collapse, programs that employ people and help keep money moving through the economy -- frequently social services and aid to cities and towns -- get gutted. State leaders are used to stitching together scraps to save whatever they can, trying to hold the line on taxes, and calling it a day.

So we need a well-orchestrated national effort to encourage states not just to avoid Shock Doctrine-style cuts, but also to adopt such infrastructure-intensive local stimuli. They'd by no means pass everywhere, but with legislators looking to do whatever they can to promote recovery in this election year, they're probably feasible in at least some number of states. Success would certainly be much more likely in blue states than in red (and provide an interesting case study in employment results), with the 16 states with Democratic control of both the legislature and the governorship being the obvious places to start. The initiatives would energize coalitions of municipalities, small businesses, environmentalists, and the construction industry's contractors and trades workers unions -- which have been utterly decimated by the recession. In states where the initiatives are popular, they'd provide voters an exciting reason to go out and vote for Democrats this fall.

A successful effort could inject another $20 billion or more into the economy and help propel the recovery as we move into 2011 and 2012. More than any other factor, the economy is motivating voters decisions, and their anger will be felt from city halls to state capitols to Congress, but elected officials who best respond to those concerns may yet be spared the coming wrath of November.

David Segal is a Rhode Island State Representative. Austin King is a former president of the Madison, WI Board of Alders.