Economist David Burress wrote an excellent letter to the JW, which was published today. If you missed it, here it is:
Ken Meier says shrinking state and local government is good medicine during a recession (12/5/09 letter). A substantial majority of economists disagree. That’s because spending government money to put people to work actually puts people to work—and then those workers spend money and put additional people to work. That’s exactly what Obama’s stimulus package was supposed to do—and an emerging consensus among economists says it succeeded. Even among members of the rather conservative Association of Business Economists, an August poll found 73% expecting the stimulus to increase 2010 GDP by at least 1/2%, with almost half expecting at least 1%.
Admittedly, things are a bit different at state and local levels because of balanced budget requirements. Usually those requirements make sense, but during a recession they’re perverse. Falling revenues are forcing most government units to cut back, leading to reductions in demand that offset the stimulus package. If those governments had been able to borrow money to keep their operations level, unemployment would be falling right now, instead of holding flat.
Even without borrowing money, it turns out that local economies can benefit if local governments increase taxes to keep their workers employed. According to an accepted principle known as the “balanced budget multiplier,” government expenditures can add more demand to the economy than taxes remove. My back-of-the envelope estimate suggests a $1M property tax increase spent on local government employees would create around 10 Lawrence jobs on net. I urge the city to fund a full study.
Lead economist, Ad Astra Institute