How Stimulus II, or a Jobs Bill, can and should help states

The Center for Budget and Policy Priorities has released a new report detailing how failing to help ailing state governments could cost almost a million jobs over the next year. The basic problem is this: States rely very heavily on sales taxes and income taxes for revenue. When incomes and sales go down because of a recession, so too does the money going to state governments.

But states, unlike the Federal government, have to balance their books every year. There is no such thing as deficit spending for them (though they can engage in short term gimmicks that only worsen the problem in the following years - California is an example of how this can lead to very deep trouble). That means that when revenue goes down, so does spending - the link is direct and the result is as instantaneous as things ever get in the realm of government spending.

All of this makes transfers to state governments a near perfect way to stimulate the economy - not only will they spend the money right away, but a huge share of it goes directly to salaries. And we are not just talking about state bureaucrats, though they are directly affected. In many states (e.g., my own state of New York) aid to schools is a big share of state spending. The CBPP cites Department of Education estimates that 318,000 jobs were saved or created through September 30 due to stimulus spending. Aid to police and fire departments can also be big, depending on the state. Happily, spending of this kind is typically well spread out over the state and population, since things like schools and cops are needed everywhere.

But the help already provided in the stimulus bill passed last winter is far short of what is needed. But how to aid states without providing federal cover for irresponsible politicians, like California Republicans, who live in a world where revenue and spending have no connection to each other? One way would be to link aid to states to benchmarks in their state budget process - requiring them to raise the revenue to cover stated percentages of spending in order to win federal money to cover the remainder. But make no mistake - this is not something states can do on their own without a sharp contraction in employment and spending. They need help from the Federal level and they need it badly. Converting some of those pointless tax cuts into additional state aid would make a major contribution to recovery. Or maybe we can just label it a "jobs bill."