Job-Creation Idea No. 2: Rescue The States

(Part of Huffington Post's America Needs Jobs series; also see the introduction and Idea No. 1.)

State and local governments are the country's largest employers. They provide essential public safety, education, health and social services -- services that are even more needed during an economic downturn. But when the economy slows down and tax receipts drop, state and local governments have to cut back. And their spending cuts don't just reduce those necessary services, they work like an anti-stimulus -- dollar for dollar.

By contrast, if you want federal money to reduce the unemployment rate, economists generally agree there's no faster or more effective way than sending it to states so they can avoid layoffs or can actually increase their hiring. States are in a position to create lots of jobs almost instantly. And state and local spending has great "bang for the buck," as economy.com's Mark Zandi describes the per-dollar effect of spending on gross domestic product.

When you spend money on stimulus, you want that money to get spent over and over again, creating more and more jobs. Zandi has calculated that aid to state and local government has more bang for the buck than anything other than extending unemployment benefits or increasing Food Stamps allocations.

The 2009 Recovery Act (AKA the stimulus) included about $144 billion in aid to state and local governments through the end of 200. But now the money is running out, and states are facing the prospect of massive layoffs.

In August, President Obama signed into law a bill sending states another $26 billion to save the jobs of thousands of teachers and other government workers -- but the original Local Jobs For America bill pushed by Rep. George Miller (D-Calif.) was for four times that much. And the Center for Budget and Policy Priorities estimates that the states' cumulative budget shortfall will likely reach $140 billion in the coming year.

Bob Pollin, an economist at UMass-Amherst, writes about the huge revenue shortfalls in the states:

The jobs recovery will not succeed until this situation is stabilized. How could it be otherwise? State and local governments account for about $2 trillion in annual spending, or 14 percent of GDP. Either directly or indirectly through their supply purchases, they generate 30 million jobs, 20 percent of the entire American workforce.

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And the money sent to the states would translate directly to jobs, he writes:

The main activities supported by state and local governments are all effective sources of job creation, in comparison for example with military spending. Thus, infrastructure projects create 40 percent more jobs per dollar than spending on the military, healthcare creates 70 percent more jobs and education creates 240 percent more jobs. So if the government just moved its 2008 budget of $188 billion for Afghanistan and Iraq into support for education and infrastructure programs at the state and local levels, this alone would produce a net increase of about 2.3 million jobs per year.

University of Texas economist James Galbraith and former Clinton labor secretary Robert Reich would go a step beyond simply sending money. Reich proposes "establishing a federal bank that will provide states and locales zero-interest loans, to be repaid when their unemployment rates drop to 5 percent or below."

And Galbraith writes:

There must now be fiscal assistance to end, finally, the budget crisis of states and localities. Federalizing Medicaid may be the most effective and practical way to achieve this. The alternative is open-ended general revenue sharing: on the condition that states neither raise nor lower their tax rates, the federal government should supply the funds required to close their budget gaps and to maintain public services at baseline levels, for the duration of the crisis.

Yale economics professor Robert J. Shiller explains the need this way:

The clock is ticking, and we don't have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help -- without telling them exactly what to do....

Unfortunately, when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble.

It's time for the public to assert loftier expectations. We need to respect existing government bureaus and organizations for their ideas, and get down to the business of financing important jobs temporarily, and on a huge scale.

TOMORROW IN THE AMERICA NEEDS JOBS SERIES: The Joys Of Retrofitting

(Want to learn more about the series? Read the overview. Got an idea you think we may have overlooked? Email froomkin@huffingtonpost.com.)

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Posted via email from Brian's posterous