Spend, baby, spend

Posted: Tuesday, February 17, 2009

Most reporters covering the Capitol in Juneau avoid budget subcommittees. Listening to bureaucrats explain why they need more money is not the raw material of stories that advance a reporter's career. But every year at this time it's my beat, and this year the beat has been, as Alaska Budget Report editor and fellow subcommittee denizen Rebecca Braun observes, "subtly enlightening."

About half the questions legislators ask of department officials are predictable, and about half are not. In the predictable category this year is a double query that goes like this:

"How much money do you expect to get from the stimulus bill?" followed by, "Is there any reason we couldn't cut your general fund (state money) appropriation by a like amount?"

On Tuesday, Department of Health and Social Services Commissioner Bill Hogan told a Senate subcommittee he expects the stimulus bill to enable the state to reduce its general fund support for the Medicaid program by up to $40 million in the current fiscal year, and by up to $60 million in the next.

At a House subcommittee meeting the day before, Rep. Sharon Cissna, D-Anchorage, asked, "What is they call it, that free money?"

No one responded, but the answer came to her a moment later. "The stimulus."

The stimulus bill, as just about everyone now knows, is supposed to rescue our free-falling economy by quickly pumping just under a trillion dollars (that's a 1 followed by 12 zeros) into the economy, creating immediate jobs. Coupled with a parallel effort to rescue the sputtering financial system, the stimulus is supposed to get households and businesses spending again.

The idea is pure Keynesian economics, developed in the 1930s, during the last worldwide depression, by John Maynard Keynes, a brilliant British economist. At that time, just about all economists thought a downturn was the time to retrench, building a cushion to see us through the hard times. The prescription for governments, businesses and households was the same: reduce spending, cut investments, conserve cash.

Keynes realized that however much this makes sense on an individual basis, it is disastrous for the economy as a whole. Reduced spending begets fears that the economy will get worse, which causes people and institutions to cut further, which engenders more fear. Keynes called this the paradox of thrift.

Economic experts today are just as confused by this unfolding depression as were their predecessors in the 1930s, but there is one thing on which today's experts agree: if the stimulus is to disrupt this economic death spiral, the plan must inject lots of money into the economy quickly in a way that defeats the paradox of thrift, or at least limits the ability of recipients to siphon the money into savings.

Alaska's state government is today deeply in the red, with a $1.4 billion deficit expected in the current year, and an even deeper hole in the offing for next year. Fortunately the state can draw on more than $8 billion in savings socked away in the constitutional budget reserve and elsewhere.

If federal stimulus money targeted for Medicaid, education aid and other similar programs is substituted for money that would have otherwise come from the state's savings, the intended effect of the federal money will have been largely frustrated.

There is every indication that Gov. Sarah Palin and legislators will use the federal money exactly that way, to conserve savings, and it's hard to imagine how they could be convinced otherwise. It's the paradox of thrift.

Putting money into "shovel-ready" infrastructure, another key part of the stimulus plan, accelerates the flow of money through the economy, but not by as much as imagined, particularly if materials for the projects are drawn from bloated inventories and don't immediately generate new manufacturing orders for cement, steel and the like.

The U.S. was where this worldwide depression started, and for the sake of the world economy, the U.S. needs a stimulus package that works. The key to making it work is avoiding the paradox of thrift. Make sure as much of the money as possible gets into the pockets of the poor and the near poor. Poor people don't save, they spend.

• Juneau economic consultant Gregg Erickson is editor-at-large of the Alaska Budget Report, a newsletter covering the state budget and economy. He can be e-mailed at gerickso@alaska.com.

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