What The Hell Are We Going To Do About The Economy?

Paul Krugman is concerned, and when he gets concerned, I start to get concerned. After opening the week by stating that the economy looks to be falling off a cliff, now he appears doubtful that even a major investment in infrastructure will do the trick:

Two points:

1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.

2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.

He wonders if we're not headed for double-digit job loss before things right themselves.

And we may be. But we certainly WILL be if we don't use a substantial amount of stimulus money on aiding state and local governments. They're basically going to have to cut their way out of all this loss of tax revenue from the early unemployment and property value losses, and that will mean less state employees, cops, firefighters, teachers and nurses. Keeping them up and running will at least staunch the bleeding and keep the cycle from spinning downward (less state revenue means more cuts means more unemployment means less state revenue means more cuts). In addition, as Ed Kilgore says:

I'd go further than Matt on this subject and observe that states have significant control over some of the "automatic stabilizers" that he's attributing to the federal government (e.g., Medicaid, SCHIP and transportation programs); without some new assistance, states may not only counter-act the "automatic stabilizers" but could actually subvert them. That's clearly what some Republican governors like Mark Sanford have in mind when they call for abolition of federal "mandates" rather than federal assistance: let us completely decimate Medicaid beyond what we are already allowed to do, and we'll be fine!

So an effective stimulus package must not only provide heavy assistance to state and local governments; it must also be sufficiently conditional to ensure that the Mark Sanfords of the world don't use the money to cut taxes as well as services.

Absolutely. The other part of this is that the states are obviously much closer to knowing what infrastructure projects are ready to go, and any money left over from fixing their budget holes could be easily directed to those spending projects. Obama appears favorable to this idea.

It's not a handout or a bailout, insisted the host of the economic forum, Democratic Gov. Ed Rendell of Pennsylvania, president of the National Governors Association. Rather, it's the "best remedy for getting America back to work," Rendell said.

"We think that we can create literally millions of new jobs and at the same time lots of orders for concrete and steel companies and asphalt companies and lumber companies and the like," Rendell said [...]

Obama on Tuesday pledged to move as quickly as possible on a stimulus package that could hasten an economic turnaround, beginning at the state level.

"I recognize that every single one of you is struggling to come up with a budget at a time when you're facing great and growing needs," said Obama, who asked the governors for the meeting. "More and more people are turning to you for help for health care, for affordable housing, to prevent foreclosures even as the credit markets are tightening and tax revenues are making it more difficult to provide that help."

Just as a corollary, I want to add that just because we're focusing on the spending side of the equation for now (and the neo-Hooverists who want to balance the budget in the midst of a deep recession are insane), that doesn't mean we can't look toward the future and come up with some revenue streams and sensible cutbacks as well. Scrutinizing federal agencies with an eye toward streamlining makes some sense, but that's not going to really have much of an impact beyond the margins. There are some other options:

• If we're not going to institute a windfall profits tax on the oil companies, we can at least roll back the subsidies that they clearly don't need, even when oil is below $50 a barrel. This savings can be plowed into the green jobs aspects of the stimulus.

• Let's come up with a legitimate way to deal with offshore tax cheats. I hate the idea of amnesty, but if losing a little in penalties and maybe a bit of the tax owed means that the government's coffers get replenished, I say we go for it. This actually worked fairly well in California with a similar type of program. We're talking about $30-40 billion annually.

• As Joseph Cirincione makes clear, there's a major budget cutback that would be simple and have pretty much no side effects - cut the nuclear weapons budget and reduce stockpiles to the level where we can only destroy the planet 100 times over instead of 1,000.

We must, of course, spend what we need to defend the country. But a good part of the military budget is still devoted to programs designed for the Cold War, which ended almost 20 years ago. This is particularly true of the $31 billion spent each year to maintain and secure a nuclear arsenal of almost 5,400 nuclear weapons, with 1,500 still deployed on missiles ready to launch within 15 minutes.

We can safely reduce to 1,000 total weapons, as recommended by Senator John Kerry and other nuclear experts. That reduction would save over $20 billion a year, according to the Center for Strategic and Budgetary Assessments.

We're in bad shape, but we do have options.