Weekly Briefing

More economic medicine, not less

Why congressional inaction is endangering the recovery

Quick take: One of the biggest problems confronting state budget writers at present is the current state of inertia in Congress. Unless federal lawmakers get moving and renew crucial programs to extend unemployment insurance, COBRA subsidies and aid to the states, North Carolina's fiscal situation (as well as its nascent economic recovery) could be plunged into crisis once more.

If there is one term or phrase that best describes the federal economic recovery efforts over the past 17 months, it would have to be "half-measures." Despite mountains of evidence that: a) the fastest way to spur a quick turnaround and end suffering involves a massive infusion of federal spending, and b) the impact of such spending on long-term deficits would be minimal, Congress has proceeded with an almost debilitating degree of caution.

In many ways, it's been like watching a timid physician treat an anemic patient with half the blood transfusions he really needs. The treatment helps and keeps the patient alive, but it's not enough to help get him out of bed.

And so it has gone in the U.S. economy. The economic stimulus has clearly worked. Millions of jobs have been created and saved and the solvency of dozens of state governments has been preserved. Most importantly, millions of families have brought home income, held onto their health insurance and stayed in their homes. The patient is clearly far better off than he was and would have been had the nation followed the do-nothing advice of the market fundamentalist right.

But, when it comes to taking the next step and providing the patient with the boost he really needs to get up and get moving, uncertainty seems to creep in. Elected leaders who appropriated billions of dollars and watched it work just as predicted, are afraid to take the next logical step. Rather than redoubling their efforts and seeing the recovery through, they seem bent on retreat. It's as if they were saying: "Oh well, that's good enough. We stopped the worst from happening – time to move on to something else."

To witness this attitude of hyper-cautious "Chicken Little-ism" in action, one need look no further than the current debate in Washington over the renewal of various economic recovery programs.

Unemployment, health insurance renewal stalled

Tomorrow, hundreds of thousands of Americans (several thousand in North Carolina) will lose their unemployment insurance and extended COBRA health insurance benefits because Congress has not yet been able to muster the courage to pass a bill extending the programs. The stated reason: concerns about the cost and the impact on the national deficit. But as economist after economist has pointed out, the impact upon the deficit and the nation's long-term debt problem are comparatively minor – especially in comparison to the near-term harm and suffering that inaction will cause.

According to the experts at the Center on Budget and Policy Priorities:

"Extension of UI and COBRA to the end of the year and continuing fiscal assistance to the states are widely recognized as effective measures to boost economic activity and create jobs in an economy with substantial excess unemployment and productive capacity. These measures are strictly temporary, and the history of past recessions and recoveries shows that they have always been allowed to expire once a strong and sustainable economic recovery is underway. Because these measures are temporary, they do not add significantly to the long-term budget deficit. In total, the parts of the bill whose costs are not offset…would increase the projected long-term budget gap (through 2050) by well under 1 percent."

In other words, if Congress fails to act to renew these important recession-fighting programs, it will be shooting itself in the foot for no good reason. Not only will it be causing great near-term harm and suffering, it will be helping to slow the economy in the name of a cause (long-term deficit reduction) that it will be doing precious little to help.

Aid to the states

A similar scenario is playing out in the area of federal assistance to the states. Right now, Recovery Act aid is scheduled to run out this year. This raises the likelihood of new and devastating cuts to core services like education. Once again, here's the Center on Budget:

"The recession has driven down state revenues by record proportions. Education makes up the largest single item in state budgets, and spending cuts there have been deep and widespread. Federal aid through the American Recovery and Reinvestment Act has lessened the impact of state budget shortfalls on education and other state services, but that aid will soon be depleted. Meanwhile, serious state budget shortfalls will likely persist for at least the next two years, reaching an estimated $180 billion in fiscal year 2011 (which in most states will begin July 1) and $120 billion in 2012. This sets the stage for even more severe cuts as states wait for revenues to recover to pre-recession levels. For 2011, legislatures and governors are enacting budgets with cuts that go even deeper than those enacted over the past two fiscal years."

As WRAL.com reported last Friday, this could lead to disastrous results in North Carolina.

"State lawmakers included $500 million in stimulus funds under the Federal Medical Assistance Percentage, or FMAP, program in their accounting for the 2010-11 budget. In their proposed spending programs, lawmakers moved money out of Department of Health and Human Services programs and intended to plug those holes with the FMAP funds.

‘It's too big a hole for us to go in and just cut our budget some more because we've cut very, very deep at this point,' state House Majority Leader Hugh Holliman said.

Deeper cuts would devastate education and cripple health and human services, House and Senate leaders said. They predicted that thousands of jobs would be lost."

Going forward

There's no doubt that the federal programs at issue are not cheap and should not be treated as such. On the other hand, it makes no sense whatsoever to treat a patient with strong medicine and then kick him out of the hospital when he's resting in intensive care after just regaining his faculties. Yes, there might be a blood shortage down the road if we do nothing to rebuild our supplies in the long run, but that's no reason not to use what we have on hand to help a sick patient right now – especially if the patient can help rebuild our supplies in the long run when he's recovered.

As renowned economist Dr. Dean Baker told a Raleigh audience two months ago, we may be in a crisis, but it doesn't have to be experienced in the form of widespread human suffering. With better policies, America's economy can be placed on much sounder footing.

Renewal of unemployment insurance, COBRA extenders and federal aid to the states would be a good place to start.