Economy experts caution state on stimulus efforts

Posted Nov. 02, 2008, at 9:54 p.m.

AUGUSTA, Maine — Several state economists say that there is little state government can do to help stimulate the state’s economy, but warn that state actions could hurt the recovery from the recession.

“State and local governments are essentially becoming a major fiscal drag on the national economy,” said University of Southern Maine economist Charles Colgan, who chairs the state’s consensus economic forecasting committee.

“Even while the federal government is stepping on the accelerator, the states and local governments are stepping on the brake,” he said.

The acceleration is from the huge increase in federal deficit spending to stimulate the economy, while the brakes are state and local governments cutting spending and laying off workers as revenues decline, he said.

Colgan said that while the steps taken to stimulate the economy are “huge,” so are the budget problems collectively facing the states. He said the billions of dollars being spent by Congress to encourage spending in the United States’ consumer-based economy can easily be offset by spending cuts in state and local government.

“We are part of the national, and the international, economy,” he said.

Jim Hughes, an economics professor at Bates College, said there are real limits on what any state can do to help the economy recover.

“The state cannot deficit spend; I think a few [states] do not have a constitutional requirement for a balanced budget, but nearly all do,” he said.

Maine’s constitution requires a balanced budget that limits what state government can borrow money for.

There is broad agreement among the economists interviewed for this report that there is little states can do to help stimulate the economy. But there also is agreement that states can make decisions that could make it more difficult for the economy to recover.

“They can really screw things up,” said Colby College economics professor David Findlay. “If states stop spending money and make cuts in programs and stop making investments, then they will slow the recovery, and there is a lot of discussion about that in the states, I think.”

Findlay agreed with Colgan that while Maine’s economy is intertwined with the world and national economies, local budget decisions could offset efforts by the federal government to stimulate economic growth.

The economists said the state has to walk a fine line of not raising taxes to make up for less revenue because that would hurt the recovery, while avoiding budget cuts that also make things worse. A significant concern is cuts to Medicaid programs.

“For every dollar the state cuts, they will lose about two federal dollars,” Colgan said. “That adds up to a significant amount of transfer payments into the state.”

Transfer payments are from various federal sources paid to Maine individuals and businesses. Social Security and Medicaid are among the largest categories for Maine, as is the purchase of the warships made at Bath Iron Works.

Several measures also are under consideration by Congress that would bring more money into the state. Extended unemployment benefits of 13 weeks, passed last summer, are now being exhausted by some Mainers, and members of the state’s congressional delegation believe it’s likely another extension will be passed.

“Those payments are among the classic stimulus measures that have been successful in past recessions,” Hughes said.

Unemployment, like expanded food stamps, puts more money into circulation as recipients spend the money on necessities and provide an overall boost to the economy.

“Direct help to the states to offset their lost revenue is important to keep states from slowing down the recovery,” Findlay said.

Congress is considering several options to accomplish that, including one-time Medicaid payments that would allow states to use the funds made available by that additional cash for other government uses. That step was taken by Congress in 2002.

Another measure getting broad support would be a one-time boost in funding to the states for infrastructure projects such as road and bridge repairs and construction. Lawmakers have been discussing a $25 billion package of aid to the states.

Bowdoin College economics professor David Vail said all states should consider increasing the investment in their people. He said the long-term advantage from a well-educated populace is well-known.

“We need to be thinking about the long term as we deal with short-term efforts,” he said. “When young people are having difficulty in moving into the work force and finding their first jobs and where adults are being laid off, we ought to be thinking now about investing more in people.”

Members of Maine’s congressional delegation say Congress could be back at work on additional stimulus measures as early as next week. House committees held holding hearings on various proposals throughout October.

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