Why States Need to be a Focus for Any Economic Recovery Plan

Why States Need to be a Focus for Any Economic Recovery Plan

We are in what the Center for American Progress has called a "labor market free-fall." The economy shed 524,000 jobs in December, the 12th month in a row of job losses. The unemployment rate spiked half a percent to 7.2 percent, and 11.1 million workers are unemployed, well above expectations.  Over the past year, the economy has lost 2.6 million jobs—more than in any year since 1945.  If nothing is done, the Economic Policy Institutes estimates that more than 5.5 million jobs are likely to be lost during this recession unless a major job-creating stimulus plan is enacted.  

The effects on state budgets and communities around the country will be profound.  Without help and if state governments address their budget shortfalls with only spending cuts, the Center for Economic and Policy Research estimates their budget belt-tightening would lead to losses of over 425,000 jobs in FY2009 and almost 900,000 jobs in FY2010.  

Avoiding 50 Herbert Hoovers:  Paul Krugman wrote in the NY Times about the dangers of a pro-growth federal spending plan being derailed by what he calls "50 Herbert Hoovers -- state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future."  Krugman acknowledges that most of those cuts are because states are "caught in a fiscal trap [since] unlike the federal government, lower-level governments can’t borrow their way through the crisis."

To deal with this fiscal vice at the state level there is a bipartisan consensus that helping states must be a key focus of the recovery package.  This is important both to prevent the massive layoffs that will ensue without federal assistance, and because programs administered by the states are some of the most effective for reviving the economy.  Mark Zandi, chief economist for Moody’s and a former advisor to presidential candidate John McCain, argued in testimony to Congress on January 7, 2009: "The most efficacious spending [for economic recovery] includes extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to hard-pressed state and local governments." 

Even groups like the United States Chamber of Commerce, who often oppose government spending, have said that a massive stimulus is needed for the economy, a " shock the economy" in the words of its head, Thomas J. Donahue, but the debate is on the priorities in that stimulus.  And while business groups like the Chamber favor a lot of  tax cuts as the solution, as Mark Zandi noted in Congressional testimony, "Tax cuts will not pack a big economic punch, as some of the money will be saved and some used to repay debt."

States and Effective Stimulus Options:  Ultimately, support for the states is a key to recovery not just to avoid the negative effects of state cutbacks, but because the programs administered by the states, from transportation systems to health care to unemployment insurance systems, are key levers for reviving local economies across the country.   The Center for Budget Policy and Priorities notes a few key principles that should guide stimulus spending, including that low-income families don't just need help the most; but as the Congressional Budget Office has explained, "... policies aimed at lower-income households tend to have greater stimulative effects" because such families have a higher tendency to spend money they receiveFully funding unemployment programs and other benefit programs run by the states, along with the transit and health programs largely administered by state and local governments, will therefore get the most bang for the taxpayers' job-creation buck.

As the rest of the Dispatch will outline, the key questions facing federal lawmakers is what shape the recovery package will take.  Our economy and state budgets in particular are facing diring circumstances.  It will take more than a short-term fix.  We need a plan that will reorient the nation back towards fundamental investments in our communities and in our citizens, such as revitalizing our unemployment and training systems, creating a greener economy, investing in technology for a 21st century economy, creating a cost-effective and humane health system, and creating the transparency in the recovery plan that will allow lawmakers to judge which programs are creating good-paying jobs and which are not.  The goal is to give state elected leaders and state advocates the tools to talk with their federal representatives about what is needed in the federal recovery plan to truly serve our communities.

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The Need in the States

This section is largely based on information from our allies at the Center for Budget and Policy Priorities who have been documenting the dire straits facing state and local governments as the recession has mounted.  

44 States face budget shortfalls; combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.  With consumers no longer using their homes as piggy banks, using  home equity loans and other sources of credit to pay for spending, sales taxes are likely to fall more steeply than they did in the last recession.   With property values crashing, property tax revenues are also affected, and local governments will be looking to states to help address the squeeze on local and education budgets. Unfortunately, with states are making cuts in health care, education and laying off workers, this is adding further to unemployment, lowered spending, and less tax revenue.  State budget gaps are therefore likely to be much larger than in the last recession.   See this graph from CBPP:

44 States Face Budget Shortfalls

Despite some conservative analysts blaming state spending for these budget gaps, the reality is that state expenditures fell sharply relative to the economy during the 2001 recession, and for all states combined they remain below the FY2001 level.  In 18 states, general fund spending for FY2008 — six years into the economic recovery — remained below pre-recession levels as a share of the gross domestic product.  Even as states have begun reducing spending, because of the sharp decline in revenues, overall state deficits over the next two-and-a-half years are likely to be in the $350 billion to $370 billion range.

Total state budget shortfalls

Some conservative legislators have suggested giving loans to the states instead of using federal spending to help make up the shortfall. However, few states would be willing to spend based on such loans and most would be legally prohibited from doing so, so a loan program would be ineffective.

Given these projections, it is all the more critical that the federal recovery plan be designed to help the states close these budget gaps.

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First Steps: Funding Unemployment Programs, Retraining and Education Programs

While a large portion of the public discussion about the recovery program has been about how much asphalt will be poured across the nation, the first question asked must be whether the program will help families survive the recent collapse of the job market, connect the unemployed with new jobs they are qualified for as those jobs are funded and become available, and retrain people for new jobs if their old ones are not going to return.  

As we highlighted in December, one of the first steps needed is to modernize state unemployment systems to cover many of workers, such as most part-time workers, denied coverage because of antiquated rules.  Thankfully, President-Elect Obama and Congressional leaders seem ready to adopt additional funds to help states make these changes as well as other reforms such as expanding health insurance programs for the unemployed as part of the recovery package.

But states need even more comprehensive assistance in revamping unemployment programs into systems for helping displaced workers.   As detailed in our Dispatch Averting Layoffs and Revitalizing the Manufacturing Economy, advocates are increasingly arguing for systems that use rapid response teams by state officials to help avert layoffs in the first place, start helping workers look for new jobs or training opportunities even before they get their last paycheck, work with networks of businesses in each sector to tranform themselves to respond to global economic shifts, and create a framework for multi-state economic cooperation to promote job growth.   Both better funding and more innovative design of federal workforce development programs are critical to all these efforts.

Making Sure Education and Retraining is Fully Funded:    One major problem with retraining programs is that their funding is not designed to increase during economic downturns when the need is greatest.  In fact, often the opposite occurs. Beyond federally-funded programs, state college programs, including community colleges that provide for a wide variety of vocationally-oriented classes, are the main hubs for retraining most people.  More than a third of the students enrolled in the nation’s colleges and universities - - 6.4 million adults - - are over age 24.            

Yet as the Brookings Institution documents, despite greater demand for such programs in a recession:

Unfortunately, neither the federal portion of the funding stream (through the U.S. Department of Education) nor the state and local funding stream (through grants to community and public four-year colleges) automatically increases in a recession. In fact, the state and local funding stream is strongly cyclical: It tends to decline in a recession.

A recent article discussing the public higher education system in Maine illustrates the challenges state funded institutions are facing due to a surge in applications to community and public institutions of higher education as a result of  the weak economy and rising unemployment rate.  As noted by John Fitzsimmons, the President of Maine’s Community College System, even as many people are looking to the community-college system to upgrade their skills or gain an education geared for the current job market, the community colleges are facing state funding cuts -- $2.9 million in the fiscal year that ends in June -- that make it impossible to expand that retraining and education safety net. 

Higher education leaders, lobbyists and student advocates have been working to ensure that negotiations over the stimulus package include mention of their priorities, such as provisions for increased need-based aid for students, additional relief for student loan borrowers, increase in Pell Grants, funds for state university infrastructure and grants to states to help colleges pay for the sort of “ready-to-go” facilities that would create jobs and stimulate economic activity.   According to House Education and Labor Committee Chairman George Miller, lawmakers are concerned about a recession-driven surge in demand for the so-called Pell Grant tuition awards and many are pushing for the stimulus package to increase federal college aid to low-income families. 

K-12 Education for Economic Competitiveness:  Beyond the immediate crisis, many worry that cutbacks in education more generally, including at the K-12 level, will just further undermine U.S. economic competitiveness and its ability to attract global employers looking for a well educated workforce.  For many states, half their budgets -- or more  -- go to education funding.   The recent economic crises ensures that many states who often even during good economic times have to scrape together enough money to properly fund their education systems, will have no choice but to cutback on education funding unless they receive federal aid.  

Many of the teacher groups and school adminstrations who are facing the large budget shortfalls that are strangling local school districts are pushing to ensure education funding is part of the 2009 stimulus package.  Many are encouraged by the Obama Administration's commitment to funding rebuilding of our nation's aging, run-down schools and  his plans to train more teachers, expand early childhood education and provide more college tuition aid.   What is still in question is whether it will be enough for the states to avoid slashing the often tattered retraining and education systems in place.

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Infrastructure, Green Jobs and Transit Priorities

President-Elect Obama is talking about investing billions in new infrastructure across the country, including new green jobs.   Some of the infrastructure priorities will come from existing "shovel ready" projects in the states, but one priority must be that if we are going to invest hundreds of billions of dollars for the future, we need to make sure that we are investing for a green economy that is sustainable over the longer-term, both economically and in jobs that will be long-lasting in a world where energy use needs to be changed for both national security and environmental reasons.  States need to receive the funding support to do more than just continue existing, environmentally destructive practices but need the funding to help shape a new green direction for our state economies.

A Green Plan for Recovery: The Apollo Alliance more than any group has highlighted key parts of a plan for economic recovery and investments in green jobs.  They project that a $50 billion per year clean energy program could create 5 million good-paying, green-collar jobs over time.  They suggest a few key programs, including:

  • Energy Efficiency and Conservation Block Grants for state and local communities to promote energy efficiency and renewable energy programs, 
  • Upgrade the energy transmission grid to better connect consumers to renewable energy sources and improve its efficiency and reliability, 
  • Invest in public transit and repairs bridges and roads to increase fuel efficiency,
  • Support loan guarantees for firms to retool and retrain their workforces in the clean energy and energy efficiency sectors
  • Invest in clean energy research and development
  • Promote state and local government training programs for green jobs, including a "Clean Energy Service Corps" to mobilize young adults and seniors in their communities.

A few of the payoffs from such investments:  Apollo outlines a range of the economic benefits from such investments, both in immediate jobs and long-term economic gains for the economy:

  • With residential and commercial buildings responsible for 40% of energy consumption, large investments in increasing building efficiency can pay off in jobs and long-term economic savings for the economy.   The energy consumption of existing residential buildings can be reduced 15% to 35% when they undergo full energy-upgrade renovations and studies show that the economic return from energy efficiency investments is $1.95 for every dollar investment, a return that will pay dividends for the economy for years to come. 
  • Investments in renewable energy such as solar and wind create 50% more jobs than the same money in the coal industry, while energy efficiency investments create nearly double the number of jobs as similar investment in natural gas systems. 
  • A 30% national gain in energy efficiency, resulting from investments in building efficiency, CHP systems, and renewable energy, will result in the creation of 1.2 million jobs by 2030.
  • An aggressive program to promote domestic manufacturing of renewable energy products alone could help create or retain 85,000 permanent green-collar jobs on the factory floor-not to mention hundreds of thousands more indirect jobs in the local economy-and benefit up to 70,000 U.S. firms capable of making the required components, mostly located in the 20 states hardest hit by manufacturing job losses.
  • Increasing green energy research and development is critical, especially since federal funding of research in the physical sciences, as a percentage of gross domestic product (GDP), was 45 percent less in fiscal year (FY) 2004 than in FY 1976.  One study showed that a one percent increase in national funding for research produced a 2.5 percent increase in private research and development funding.

Mass Transit and Repairs, Not New Roads: As U.S. PIRG describes in a just released report, of nineteen states that have publicly released their lists of projects for which they are seeking funding, 75 percent of funds were for highways and only 17 percent was for public transit or intercity rail.  In fact, seven states would allocate 1 percent of less to non-highway transit spending.   And most of the states have been asking for new and expanded roadways rather than addressing the backlog of repair and maintenance projects that are chronic in most states. And  road repair and maintenance are much better job creators: they generates 9 percent more jobs than constructing new highways, while nearly ten percent of new road costs are diverted to purchases of land and rights of way that generate few jobs. As the report details, one of the best uses of stimulus money would be just to help states restore mass transit services previously cut:

The fastest possible way to get transportation funds into the economy is to restore transit services and fares that were in place just last year, before state and local budget cuts forced agencies to cut services and raise fares...This kind of spending has a triple benefit for stimulating the economy: it preserves transportation jobs, increases spending power for the record number of American transit users, and helps connect workers to jobs.

As the U.S PIRG study notes, a survey of 216 public transit systems by the American Public Transit Association identified over 700 transit projects that could be initiated within 90 days of federal funding. Totaling $12.2 billion, these projects would create and support 340,000 American jobs. With a two year recovery period horizon, unfortunately all too likely,  there is a total of $47.8 billion worth of public transit projects have been identified that would yield over 1.3 million jobs." 

As the recovery package is debated, progressive state advocates need to make sure that "infrastructure" investments are not just the same-old kinds of spending, but should push for the green jobs, energy efficiency, and public transit spending that can make state economies economically and environmentally sustainable for the new century.

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Investing in a 21st Century Digital Network

In an effort to stimulate the floundering U.S. economy, President elect Obama has stated that he will make increasing access to high-speed Internet and increasing students access to 21st century technology a key component of the recovery plan.  In his radio address on December 6th, he argued that such investments were critical since: 

[It was] unacceptable that the United States ranks 15th in the world in broadband adoption...every child should have the chance to get online, and they’ll get that chance when I’m President — because that’s how we’ll strengthen America’s competitiveness in the world.  In addition to connecting our libraries and schools to the internet, we must also ensure that our hospitals are connected to each other through the internet.

With a well-designed package, investment in broadband infrastructure can bring much needed short-term stimulus to the economy, creating a large amount of  jobs in 2009.  In fact,  under one estimate, the ITIF predicts that promoting an additional investment of $30 billion in America’s information infrastructure in 2009 would  create about 949,000 jobs.

Moreover, spurring investment in broadband networks has many long-term benefits that will help lay the foundation for long-term economic success and societal benefits.  For example, a strong broadband infrastructure can help improve education, allow for better access to health care, and provide a mechanism for more efficient energy management and a reduction in green house gases.  Additionally, in the long-run, assuring equal access to digital technology is necesary for assuring economic opportunity for all members of our communities. 

Steps to Strengthen State Deployment of Digital Technology:  In order to ensure that the broadband stimulus efforts achieve their intended goals it is essential that the federal government work in collaboration with state governments, to build up the nation's digital infrastructure.  Any plan should make certain that states have a key role in designing and implementing programs to increase access to and adoption broadband for their citizens.  

For example, fully funding the Broadband Data Improvement Act, S. 1492, which passed last October without any appropriated or authorized funding levels, would promote broadband deployment and adoption by mapping high-speed Internet availability through the collection of comprehensive data. The legislation would provide grants for states, among other things, to develop and implement statewide initiatives to identify and track the availability and adoption of broadband services, to create and facilitate in each county or designated region in a state or local technology planning team and to establish programs to improve computer ownership and Internet access. 

Additionally, any broadband stimulus package must be carefully targeted and tied to public service principles that ensure that American taxpayers get a strong return on their investment. Some major issues that the package should address are:

  • Increasing access to affordable “future proof” broadband in under-served areas, such as rural America and low-income communities.
  • Increasing adoption of 21st century technology through demand aggregation, digital inclusion initiatives, digital skills training and increased access to computes. For example, Robert Atkinson, head of the Information Technology and Innovation Foundation, suggested that the federal and state Lifeline and Link-up programs, which subsidize telephone service for the poor, could be repurposed to underwrite computer equipment purposes and training for the same population.
  • Upgrading our urban infrastructure to meet world-class standards.
  • Promoting children’s access to technology at school and at home to ensure that all students are gaining the necessary skills to participate in a 21st century economy. 
  • Ensuring clear accountability, transparency, affordability and quality of service standards.

In anticipation of the President-Elects stimulus package, several groups have published detailed proposals to highlight how the broadband-related investments they believe should be part of the stimulus package.  Below is a sample of some of these proposals:

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Health Care in the Federal Recovery Package

Congress may have SCHIP reauthorization on Barack Obama's desk just as he ascends to his new job; funding a key state health care program to extend coverage for children, many of whom will be losing coverage as their parents lose their jobs.   Congress is planning to vote this week on a bill similar to the one twice vetoed by President Bush in 2007.  The likely $35 billion spending package would enable states to expand SCHIP programs to cover 10 million people.  

The vote on SCHIP will come as states are planning cuts to Medicaid and other health care programs in order to balance budgets. According to Families USA, more than 1 million people in 8 states could lose health care because of planned or possible Medicaid cuts, and millions more could see reductions to benefits or increases in out-of-pocket costs.  13 states are planning cuts to benefits, at least 5 are planning increases in out-of-pocket costs, and 14 are planning cuts to rates of reimbursement to doctors that care for Medicaid patients.  In Maine, for instance, Governor Baldacci is asking President-Elect Obama for a $100 million increase in federal Medicaid spending for the state, as well as increases for food stamps and job training.  Said Baldacci, we "need to make sure we keep providing the services that are in greater demand in this recession."  As his request - and those of other Governors - is being considered, Baldacci is planning $25 million in cuts to the state health department to help balance a current $140 million deficit.

These deficits -- along with promises of assistance for extending coverage highlighted in the confirmation hearings for Former Senate Majority Leader Tom Daschle as head of Health and Human Services - are combining to underscore the necessity of including health care in the second federal stimulus package.  

Health Care Funding as Job Creator: Details are still emerging, but President-Elect Obama said he wants $100 billion to temporarily increase the federal matching rate for Medicaid and to computerize all medical records within five years.  According to Families USA, increasing federal Medicaid funding will not only preserve health care for millions of people, it will also "have a measurable effect on business activity, jobs, and wages in every state in the country."  For instance, an influx of $800 million of federal Medicaid spending in Missouri would create 13,000 new jobs and $1.4 billion dollars in new business acitivity in the state, says Ron Pollack, Executive Director of Families USA.

Health care advocates are mobilizing around the need for investments in health care as part of the stimulus, as well as for broader health care reform in 2009.  As leaders note, now is the time to increase investment in health care programs as people turn to Medicaid and similar programs when they lose their jobs or employer-based health care.  Health care ranks as the number one economic concern facing families and the stimulus package being crafted must help states expand the safety net by investing in public helath care programs.  This is necessary to avoid exacerbating the economic problems that have resulted in the faltered economy; or, as national advocates like Families USA and SEIU are saying in a new TV ad, "Fixing the economy means fixing health care." 

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Conclusion: The Need for Transparency in Spending in the Recovery Package

If the need to promote a recovery plan is clear given the dire economic situation, it is also clear that spending hundreds of billions of dollars requires careful oversight to assure that taxpayers are getting their money's worth and that the programs are delivering on their goals, especially the primary goal of delivering decent-paying jobs to millions of out-of-work Americans.  As multiple states spend recovery funds on multiple programs, information needs to be collected on the results so policymakers can decide which programs are delivering and which should be abandoned in favor of policies that are succeeding.

Our nation definitely needs to do better on transparency and disclosure than the $700 billion banking bailout bill, which an oversight panel described as failing to monitor the use of funds provided to specific financial  institutions.  As the panel argued, the federal government "should be responsible for holding individual institutions accountable for how they use the public's money."

Encouragingly, President-Elect Obama has stated  that he thinks any recovery plan should include clear transparency measures:

Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently, and informed by independent experts wherever possible.  Every American will be able to hold Washington accountable for these decisions by going online to see how and where their tax dollars are being spent. 

The important thing is that this extends beyond just line items in the federal budget but down to contractors with state and local governments and the subcontractors hired using that public money.   The public need to be able to track which forms of spending is creating jobs and how many, along with whether the wages paid are enough to support a family. 

It is crucial that the federal government support states at this economic crisis, but in turn states need to work with the federal government in creating transparency rules that will assure that the public's trust is honored and the end result are the millions of jobs created that elected leaders and the public know is necessary.

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Why States Need to be a Focus for Any Economic Recovery Plan

Center for American Progress - Labor Market Free Fall
Economic Policy Institute - How bad could it get?
Center for Economic and Policy Research (CEPR) - Will Workers Survive State Budget Belt-Tightening
U.S Congress - Democratic Sterring & Policy Committee Forum on the American Recovery and Reinvestment Plan: Prepared testimony and information packet on forum
Congressional Budget Office - Options for Responding to Short-Term Economic Weakness (January 2008)
Center for Budget & Policy Priorities - Sobering Jobless Data Highlight Need for Recovery Package to Focus on Hard-Hit Families And States

The Need in the States

Center for Budget and Policy Priorities - State Budget Troubles Worsen
Center for Budget and Policy Priorities Converting State Fiscal Relief To Loans Would Render It Ineffective As Stimulus


First Steps: Funding Unemployment Programs, Retraining and Education Programs


Progressive States Network - Unemployment Insurance Modernization Should be Part of Recovery Plan
Progressive States Network - Averting Layoffs and Revitalizing the Manufacturing Economy: Lessons from the Great Lakes States
Brookings Institution - The Stimulus Package Should Help Workers Get Retrained
States Add Schools to Stimulus Wish List
Obama Pledges Schools Upgrade in Stimulus Plan
A Surge in Enrollment


Infrastructure, Green Jobs and Transit Priorities

Apollo Alliance - Apollo Economic Recovery Act Proposal
Apollo Alliance - Apollo Economic Recovery Act Data Points
U.S. PIRG - Economic Stimulus or Simply More Misguided Spending?

Investing in a 21st Century Digital Network

President-Elect Obama - American Recovery and Reinvestment- Speech Jan. 8, 2009
Obama Pledges Massive Stimulus Package 
Obama: Broadband, Computers Part of Stimulus Package
Free Culture Down Payment on Our Digital Future
Broadband, Broadband-Related Stimulus Proposals
Information Technology & Innovation Foundation - The Digital Road to Recovery: A Stimulus Plan to Create Jobs, Boost Productivity and Revitalize America

Health Care in the Federal Recovery Package

Kaiser Family Foundation - Rising Unemployment, Medicaid and the Uninsured
Kaiser - Medicaid in a Crunch: A Mid-FY 2009 Update on State Medicaid Issues in a Recession
Kaiser - Turning to Medicaid and SCHIP in an Economic Recession
Families USA - Stand Up for Health Care
Health Care for America NOW! - Strategy Briefing and "Spread the Word"

Conclusion: The Need for Transparency in Spending in the Recovery Package

Congressional Oversight Panel for Economic Stablization - Questions About the $700 Billion Emergency Economic Stabilization Funds