The Sound of One Hand Clapping

The absurdities of the American fight against the Great Recession are depressingly funny. Here are key bits from a New Yorker article by James Surowiecki:

If you came up with a list of obstacles to economic recovery in this country, it would include all the usual suspects—our still weak banking system, falling house prices, overindebted consumers, cautious companies. But here are fifty culprits you might not have thought of: the states. Federalism, often described as one of the great strengths of the American system, has become a serious impediment to reversing the downturn.

...

Think about the $787-billion federal stimulus package. It’s built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.

...

Fiscal federalism also makes it harder to spend the stimulus money efficiently. Much of the tens of billions of dollars that will be spent on roads, for instance, will be funnelled through the states. As a result, a disproportionate amount of the money will be spent in rural areas (which exert disproportionate influence on state governments), leaving cities—which happen to have most of the people and most of the traffic—shortchanged. The top eighty-five metropolitan areas in the country are responsible for about three-quarters of the country’s G.D.P. Yet less than half of the road money will be invested there.

...

Even more important, federalism is getting in the way of the creation of a “smart” American power grid. This would involve turning the current hodgepodge of regional and state grids into a genuinely national grid, which would detect and respond to problems as they happen, giving users more information about and control over their electricity use, and so on. It could also dramatically reduce our dependence on oil. Wind power could eventually produce as much as twenty per cent of the energy that America consumes. The problem is that the places where most of that wind power can be generated tend to be a long way from the places where most of that power would be consumed. A new grid would enable us to get the power to where it’s needed. But since nobody likes power lines running through his property, building the grid would require overriding or placating the states—and the prospects of that aren’t great.

The tension between state and national interests isn’t new: it dates back to clashes in the early Republic over programs for “internal improvements.”

This is a tragedy. Just like the Obama "simulus" bill going through the meat grinder of Congress and coming out as tax cuts and pork barrel projects that will take years to get started instead of those "shovel ready" infrastructure projects that candidate Obama talked about in late 2008. Yes, a tragedy.