- The Washington Times - Tuesday, December 15, 2009

OPINION/ANALYSIS:

Despite perceptions to the contrary, evidence is mounting that the American Recovery and Reinvestment Act (ARRA), which the Obama administration and Congress enacted early this year, cushioned the recession and slowed job losses.

The nonpartisan Congressional Budget Office recently estimated that ARRA has preserved or created as many as 1.6 million jobs to date. As Mark Zandi, chief economist of Moody’s economy.com, put it: “The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery.”

But the economy is not yet out of the woods. Far from it. We may need further federal action to bolster the still-fragile economy and soften the toll of this deep downturn on families across America.

Optimally, with the nation facing unsustainable long-term budget deficits, Congress would offset the costs of such further action with spending cuts and/or tax increases taking effect in later years when the economy is much stronger. Nevertheless, if Congress cannot offset the costs, it still should act to help ensure that the economy does not fall back into recession — as long as the steps are strictly temporary and don’t add to deficits on an ongoing basis.

Congress almost surely will continue to provide additional weeks of unemployment benefits and extended health insurance for jobless workers before recessing for the holidays. To spur job growth, President Obama has proposed new tax breaks for small business, new investment in infrastructure, and new consumer incentives for energy efficiency.

But Congress should consider another measure that could provide more “bang for the buck” when it comes to saving or creating jobs than various other measures — further fiscal relief to enable states, struggling with their own huge deficits, to avert steep tax increases or deep cuts in health, education and other key services that would weaken the economy.

States began this recession with their largest budget reserves in history, but the dramatic fall in revenues generated massive budget shortfalls. Since states must balance their budgets each year, they are closing these shortfalls by cutting basic services, laying off workers and raising taxes.

At least 41 states plus the District of Columbia have cut services ranging from K-12 and higher education to health care and services to the elderly and people with disabilities. When states cut spending, they cancel contracts with vendors, reduce payments to service providers, and lay off state employees, removing demand from the economy. Cuts in services also erode the safety net just when vulnerable families need it most. And at least 30 states have raised taxes.

To minimize these state actions, the recovery act contained $140 billion in state fiscal relief, mostly in more federal funding for Medicaid (in which large numbers of laid-off workers are enrolling temporarily) and education. By closing 30 percent to 40 percent of state budget shortfalls, these funds have preserved hundreds of thousands of private- and public-sector jobs.

But expanded federal Medicaid assistance is scheduled to end abruptly after December 2010, and increased federal funding for state and local education will run out about the same time. States, however, will still face deficits for the next state fiscal year (starting July 1, 2010) that, we estimate, will total about $140 billion. The resulting large state and local budget cuts and tax increases will seriously weaken the economy. Goldman-Sachs classifies the coming state and local fiscal retrenchment as one key reason that it expects the economy to slow in the year ahead.

Many states likely will respond to the end of enhanced federal Medicaid funding by cutting Medicaid eligibility substantially, casting hundreds of thousands of low-income people into the ranks of the uninsured. Florida’s health agency has given Gov. Charlie Crist a proposal to terminate Medicaid eligibility for 80,000 low-income people on Jan. 1, 2011, and other states may follow suit when governors unveil their budget proposals starting next month.

Big Medicaid cuts also will cause significant job losses among health care workers, as cash-strapped states also shrink already low reimbursement rates for private health care providers.

Some states, for good reason, won’t cut Medicaid deeply enough to fully offset the loss of enhanced Medicaid funding. Instead, they likely will cut education significantly — just as the federal fiscal relief that is now limiting state and local education cutbacks is ending — and they will cut aid to local governments, which could prompt layoffs of police, fire and other local government employees.

After all, states have few other places to find the savings they will need to offset the loss of federal fiscal relief funds. Education and Medicaid are generally the two largest components of state general-fund budgets.

We estimate that unless Congress gives states some additional fiscal relief, state budget cuts and tax increases could cost the economy 900,000 jobs next year, raising chances that the economy will slip back into recession.

Congress must act soon. Although states’ next budgets won’t take effect until July 1, policymakers are beginning to make decisions about those budgets. Governors are preparing their budget proposals now, and legislatures will act on them this winter and spring.

Congress is right to further extend unemployment benefits and added health insurance for jobless workers. The president is right to suggest further job-creating measures. Now, policymakers should take what could be one of the most effective steps to preserve or create jobs — providing further fiscal relief to avert massive state fiscal retrenchment that would materially weaken the economy.

Robert Greenstein is executive director of the Washington-based Center on Budget and Policy Priorities.