Maryland Republicans, as you might expect, opposed Gov. O'Malley's tax increases last year. Though they failed to prevent those tax increases, they understandably want to paint them in the worst possible light, both out of political conviction and out of a desire to hurt O'Malley's chances at reelection. However, their efforts to do so have, to date, come off as... well, like partisan hackery, rather than an honest attempt to assess the economic situation in Maryland. Seemingly ignorant of the fact that this country, Maryland included, has been in an ongoing financial crisis for the past year (one that has gotten significantly worse in the last few days), Maryland Republicans have taken to arguing that anything bad that happens to the state's economy is a direct result of O'Malley's tax increases. Which, if taken literally, is demonstrably false (e.g. Brian Griffiths claiming that the tax hikes are causing the recession in Maryland and again that they are depressing sales tax revenue); and, if taken more loosely -- i.e. that the tax hikes are exacerbating the economic downturn's effects in Maryland -- is usually just asserted, with no attempt to disaggregate the effects of the tax hikes from the broader economic trends.
Case in point: Troy Stouffer's piece in the Sun yesterday decrying the effects of the special session tax hikes on the state's economy. He writes:
Another point I found interesting is that revenue from taxes on cigarettes is also declining. This is because the tax increase of $1 a pack has caused a big drop in the sales of cigarettes. I thought that the increase in cigarette taxes was intended to help smokers quit their "nasty" habit. Why is a drop in cigarette sales seen as a bad thing? Could it be that it was never about reducing smoking but was just another way for the Maryland government to take more money from the citizens of the state?
Now there is an argument to be had here about the wisdom of using tabacco taxes to fund expanded Medicaid services (which Stouffer neglects to mention), but what's glaringly obvious is that, in an economic slowdown (and one accompanied by a dramatic spike in oil prices that has only recently come down), disposable income shrinks, and sales of luxury items like cigarettes will go down. There is the question, of course, of how much and how necessary smokers view their habit, but Souffer blithely ignores that for a liberal conspiracy to gobble up tax dollars.
One other thing to note. Stouffer says toward the end:
The only factor keeping the state economy afloat is our geographical position next to Washington, D.C.
Similarly, the only thing keeping Los Angeles' economy afloat is all the movie stars who live and work there, and the only thing keeping Alaska's economy afloat is oil (well, that and federal earmarks). Not only is it a non-sequitur, it's false: The port of Baltimore is still an economic driver in the state, and thanks to the recent growth in exports, even more so. Maryland, of course, is facing economic problems, but the beginning of wisdom here is having a good grasp of what is actually going on economically in the first place.
The Ministry of Finance and the Federal Reserve had no choice but to intervene due to one single reason: The collapse of Fannie Mae and Freddie Mac could have precipitated a core meltdown of the American bank and stock market systems, dragging the rest of the world with it into the abyss.
That is because these two banks are responsible for $5.3 billion (3.7 billion euros) of America's $12 billion (8.4 billion euro) total mortgage debt. That corresponds to one third of America's gross domestic product.
But never fear, the CEOs of the collapsing companies are safe:
Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be "without cause," according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.
Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company's troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.
Meanwhile more than one half of the state governments in the U.S. are running massive deficits too, but no bailout is in store for them.
At least twenty-seven states, including several of the nation's largest, face budget shortfalls in fiscal year 2009. Of these 27 states, specific estimates are available for 22 states and the District of Columbia; the combined deficits of these 22 states plus the District of Columbia are expected to total at least $39 billion for fiscal 2009 -- which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected.
The 22 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $39.1 to $40.8 billion, averaging 8.9 - 9.3 percent of these states' general fund budgets.
We understand the political logic of a second stimulus; the economic case is less convincing. Any fiscal stimulus must be targeted, timely and temporary. That is, it must put money in the hands of people who are likely to spend it quickly -- while not committing the federal government to new long-term spending.
Naturally to make their case the Ed Board selectively picks and chooses which parts of the stimulus package to highlight.
House Speaker Nancy Pelosi has called for a $50 billion package, possibly including increases in food stamps and home heating assistance as well as more Medicaid money for states and new infrastructure spending. Fleshing out Ms. Pelosi's concept, Senate Appropriations Committee Chairman Robert C. Byrd (D-W.Va.) has unveiled $24 billion in proposed energy, infrastructure and disaster relief money.
We'll move beyond the fact that many people think supplemental medicaid funding is a really good idea to the more pressing point; the Wapo Editorial Board failed to mention or mention only in passing two plans that many experts say should be the staples of any second stimulus package; aid to states and infrastructure spending. AWall Street Journal article from last month (subscription only) shows Congressional leaders getting on board with the idea so I am lost as to why it received no attention in the Op Ed:
The bill, which would likely include spending on road projects and aid to stated, isn't expected to come up in the House until September
We proved earlier this year that stimulus checks on their own are not the solution to the nation's economic woes. However not recognizing the obvious need for help that states have been screaming about over the last several months is just irresponsible. Not to mention their editorial reads just barely on the sane side of illogical.
Their suggestion that we don't know the effects of the first stimulus yet is asinine. The Post even admitted this on Thursday. On page 10 of the Washington Post Express they ran an article entitled "Stimulus Checks Run Out"
Analysts said retail sales would have been more feeble without the $92 billion in rebate payments the government sent out in May, June, and July. Those checks helped to counter plunging home prices, rising unemployment, and soaring gasoline prices.
The bulk mailings are now over, though, leaving economists worried about what will happen next.
WaPo can't have it both ways. They can't report that the stimulus checks are running out but then opine that we shouldn't have a second stimulus because we don't know the effects of the first.
And sure gas prices have been falling over the last couple of weeks, but today's national average for a gallon of gasoline is still $3.77. Am I glad its down from the high of $4.11 that we saw in mid July? Yes. Am I convinced that this means I don't have to worry about gas destroying my wallet? Absolutely not.
According to the Fuel Gauge Report, gas is still $4.07 in California where their budget crisis has gotten so bad that over 200,000 state employees had their pay rolled back to minimum wage. It's $3.89 in Michigan, where unemployment is skyrocketing. Its $3.98 in New York where Governor Patterson has been forced to slash medicaid by $500 million this year and $1 billion next year. The relief at the pump will be short lived because state governments don't have the resources to ensure normal citizens won't feel the pain of floundering state economies.
The Washington Post should know better. After all, the situation is going from bad to worse in their own back yard. A Richmond Times Dispatch article has Governor Kaine says the budget shortfall could surpass $1 billion. This coming on the heals of cutting $2 billion out of the budget this year. He says he's going to apply the same formula:
Kaine said he probably would apply the same basic principles to the next round of economies that he did previously -- to not cut across the board but target more precisely areas that can be reduced. Some lawmakers and lobbyists aren't sure that's possible.
I'm not sure thats possible either. There are a limited number of areas that can be reduced before you start having to cut education, public safety, health, and other essential services. We may be months away from the endgame, but counties and cities are bracing for the worst.
"We expect, and are preparing for, very bad news," said Michael L. Edwards, a lobbyist for the Virginia Association of Counties.
What the Washington Post fails to understand is that dealing with the nations economic problems has to go beyond fixes for the individual. I would love to receive another check in the mail but it's not what's going to fix this thing. The real solutions lie in federal aid to the states and spending on infrastructure, two moves that will help states who are being forced to make dramatic cuts to essential services and potentially create jobs in states were there are far two few of them. These solutions received little to no attention in the Op Ed, which is really the biggest flaw of all in the piece.
(Good follow-up to Eric's post on the state's budget deficit. - promoted by Isaac Smith)
Like so many other states, Maryland could be on the cusp of a huge budget shortfall. The Washington Post is reporting that lawmakers learned that a $200 million budget shortfall could be on the horizon if the economy doesn't get better.
Legislative analysts reported that collections of income and sales taxes, the two largest sources of general fund revenue, have fallen short of expectations, a trend that shows no signs of changing soon.
"You probably need to start thinking about what you're going to do . . . if revenues don't meet their targets," said Warren Descheneaux, the General Assembly's top budget analyst.
Yea, I'd say that wouldn't be such a bad idea Mr. Descheneaux. Even though this shortfall isn't nearly as bad as the $1.5 billion gap that required a special session last year, its still around $200 million more than you'd like to see. Especially when there are no signs that this dragging economy is going to tick upwards anytime soon.
The Gazette has a good overview of how the Board of Public Works' recent $50 million in budget cuts fits in with the downturn in the economy. Those cuts won't likely be the last:
‘‘I think you [would] almost have to go across the board,” said House Appropriations Chairman Norman H. Conway (D-Dist. 38B) of Salisbury. ‘‘You’d have to go back and look at the doomsday budget from special session.”
That prospect has nearly every state agency and interest group that receives state aid on edge.
‘‘We are sort of looking at déjà vu all over again,” said David S. Bliden, executive director of the Maryland Association of Counties. ‘‘Now, we look with great trepidation with the state struggling with a fall in budgeted revenues. And of course, that causes fear that there will be people advocating for solving any future problem on the backs of local governments.”
Department heads and advocacy group leaders say their budgets have already been trimmed to the bone and further reductions will mean delaying spending, eliminating programs or laying off employees.
The article paints a rather dreary portrait: It's possible that fully implementing the Thornton education plan, already delayed, may be put off indefinitely; state aid to local governments may take another hit; and the potential for more budget cuts depends significantly on whether the slots referendum passes this November. So the Stop Slots campaign may find themselves painted in a corner if they're not careful.
At the same time, Maryland has been weathering the recession better than most states: our unemployment rate is only 4 percent, compared to 5.5 percent nationally; and our major industries, e.g., the federal government (including the military), health care, biotechnology, and education, are acyclical in nature. That is, their performance doesn't depend on how the rest of the economy is doing. That said, the persistent rise in oil prices, combined with the continued depreciation of the dollar against the euro and other currencies, means that the national economy, including Maryland's, will likely be in a slump for a while. Unless we start to get a handle on both phenomena, or the federal government decides to increase state aid, more budget cutting, and more severe budget cutting, may be inevitable.
Ironically, that may send the economy into an even deeper tailspin. Louis Uchitelle had a great report a few weeks back describing how the effects of the recession have been relatively muted due to spending by state and local governments, which have accounted for almost half of economic growth since autumn last year. Declining revenues, however, are forcing many states to cut their budgets, which will likely cause the economy to actually contract in the next year, not just grow at an anemic rate. Dealing with that situation ought to be a top priority of Congress -- and the next President.
Just when you thought the economy had hit rock bottom. The Conference Board, a non-profit global business organization has reported that its consumer confidence index has dropped to its lowest point since the last recession in 1992. The New York Times paints the grim picture:
Tuesday’s data suggested a nation struggling with expensive gas and devalued homes, where people are fearful for their jobs and wary about where the economy is headed.
Any positive signs that economists and forecasters may have cited need to be thrown out the window. Even with the consumer confidence index at 50.4%, down a whopping 7.7% from May, the worst may still be yet to come. This report should be a wake up call to legislators across the country on behalf of a nation in desperate need of more help.
As the economy worsens, more and more key players are getting on board with the idea of a second economic recovery package. But not everyone's where we need them to be to get something done in time to matter. For example Rep. David Obey (D-WI), powerful chairman of the Appropriations Committee free associated to Congress Daily (subscription only) and revealed that he doesn't quite get how urgent doing something to stave off this recession is:
"People use all kinds of terminology; I don't care if you call it a second supplemental or a second economic [stimulus] package -- to me there are all kinds of things that we need domestically -- but we need finish this job [war supplemental] before we can start thinking about the next one"
This pains me. Not only are House Democrats punting on telecom immunity, they're putting war spending ahead of domestic spending.
As I wrote on myDD, Bush's first economic stimulus package just didn't work. We didn't get the big sweeping surge of economic growth we were promised. Even what good news we've gotten was drowned out by a chorus of story after story of bad economic news. The costs of living are growing rapidly as employment becomes harder to find. Food is getting more expensive as food bank lines grow longer. The longer Congress waits to act, the worse things will get.
At least 12 states have implemented or are considering cuts that will affect low-income children's or families' eligibility for health insurance or reduce their access to health care services.
At least 10 states are cutting or proposing to cut K-12 education; three of them are proposing cuts that would affect access to child care.
At least 11 states have proposed or implemented reductions their state workforce. Workforce reductions often result in reduced access to services residents need.
And when states are forced to do things like cut their state workforce, the economy suffers even more. According to CNN/Money:
With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. Many expect more job cuts ahead as public officials struggle to balance their budgets.
Economists say that cutbacks in jobs and spending by local governments could be a major drag on the overall economy.
It's cool that Obey recognizes the need for a second stimulus package. But he also needs to understand that each day he lets pass without doing something means the economic hole we're in is that much deeper and is going to require that much more federal spending to help us get out of.
So in his latest bout of hysteria, Brian Griffiths informs us that Martin O'Malley (in part) caused the recession through the special session tax increases. Which, if true, would be pretty weird, given that the housing and financial markets, the real drivers of the current recession, began crashing in the middle of last year, whereas the tax increases only took effect in the beginning of this year. Those must be some pretty powerful tax hikes.
Of course, Brian's point (I think) is that the tax increases are exacerbating the recession's effects in Maryland, which is debatable; certainly the Washington suburbs have been doing better than the national average in terms of employment, and Maryland's unique economic features make it more resilient to downturns generally. Things could get worse, however, if the state made the draconian kind of budget cuts that Brian and other Republicans have been clamoring for. As I've noted before, budget cuts during a recession are actually more harmful to the economy than tax increases, since it exacerbates the problem of falling consumption by reducing consumption even further.
The New America Foundation's Rourke O'Brien argues for making it easier for the poor to save and still qualify for government assistance:
In order to qualify for government assistance, from cash welfare and food stamps to disability income, low-income families must demonstrate they are not only income-poor but also asset-poor. These rules were understandably designed to preserve assistance for those truly in need. Yet, while policymakers created an asset test to keep hypothetical, unemployed trust-fund brats from collecting government checks, these rules are sending a dangerous message to low-income families: Do not save.
Any money that families might have saved in low-wage jobs must be spent before they apply for government assistance. One young woman I met while interviewing recipients at a welfare office in Maryland laid bare her understanding of the relationship between saving and public benefits: "I definitely don't think you can have any money in a bank account and still get assistance."
Although Maryland permits families to hold up to $2,000 in liquid assets and still qualify for assistance, she believes the existence of an asset limit - and the caseworker's duty to investigate financial holdings - sends a clear message that saving will be penalized.
I agree with O'Brien's proposals to fix the problem -- namely, making certain types of assets, like education or retirement funds, exempt from the asset test. I would also add that the payroll tax, as currently structured, makes it harder for low-income families to save, and that replacing all or part of it with, say, a carbon tax, would benefit them greatly.
Jay Hancock notes that not only does Maryland have the highest median income in the US, it also has a fairly low level of income inequality:
Economists use an indicator called the Gini index to gauge inequality. 0 on the Gini scale is total equality: 20 percent of the population gets 20 percent of the income, 30 percent of the population gets 30 percent of the income, and so forth. 1 is perfect inequality: One guy makes all the income in a given year, and nobody else makes anything. In U.S. states last year, Gini scores ran from 0.410 for Utah -- lower inequality -- to 0.537 in the District of Columbia, which indicates higher inequality. Maryland's score was 0.433, indicating the 13th-lowest inequality in the country.
Maryland was one of only three states among the top-10 income states to have an inequality index this low. So not only is what wealth we have widely shared; compared with income in other states, there's a lot of it. Several states that did well in inequality scores last year also ranked poorly in income. Maine, New Hampshire, Vermont, Wyoming, Idaho, Indiana, Iowa and Montana all had higher equality. But they also had low income.
Maryland, it appears, has pulled ahead of New Jersey to become the wealthiest state in the union the state with the highest median household income, according to the Census Bureau. I don't have much to say about this (which is probably why I didn't post on it yesterday, when the report appeared), but I did want to highlight some reactions from around the internets:
David Lublin points out the irony of Maryland being a rich state, but on the verge of getting hammered with a large budget deficit.
Bruce Godfrey downplays the significance of the new standing, saying that we're statistically no richer than New Jersey, and that the connection between income and standard of living is weak. I have to disagree with him, though, about his characterization of Maryland as six states instead of one: Isn't every state an arbitrary combination of rural and urban elements?
And Jay Hancock argues that Maryland's dependence on the federal government (especially the defense sector) for its economy means trouble ahead, as Congress slows down the growth in government spending.
The new living-wage bill came up last night on the Pressing Issues show (a Frederick local-affairs cable roundtable show on which I occasionally appear). The two Republicans on the panel predictably complained about the law, firing off the usual talking points about how this was going to drive up the cost of school construction and cost the taxpayers money and all that.
I wish I'd thought of the Ehrlich one-wage-fits-all excuse for not supporting the bill, but my counter was that better-paid employees, with their increased purchasing power, would help stimulate the local economies accordingly. Demand-side economics at its best. I don't know why this kind of argument isn't made more often by living-wage advocates -- leaving the "fairness" issue aside, it's good for consumers to have money to spend, isn't it?