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National Governors' Association Meeting Gives Negative View on Economy
nkr25@cornell.edu
| February 24, 2009
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Those of us who have been following the economic news could not be faulted for feeling rather hopeful for the past few months - it's been a while since the recession officially ended; the unemployment rate, which was hovering above 10%, fell to 9.7% a couple of weeks ago; the stock market has shot up 50-60% from the depths it hit last spring. Aren’t these signs that we are finally out of the worst economic disaster since the 1930’s? Isn’t our economy well on the way to a sustained recovery that should take us back to the kind of prosperity we enjoyed just a couple of years ago? Well, the news that came out of the National Governors’ Association meeting in Washington, DC, presents rather sobering thoughts for the near-term economic prospects. As reported in the Saturday edition of the New York Times, the governors expressed fear that the worst was yet to come at the state level, where revenues continued to fall short of projections already modest expectations. According to the projections made by the governors’ association, the upcoming fiscal year beginning July 1 could be the “most difficult to date.” The falling revenues at the state level provide as good an indication as any that the current economic recovery is rather anemic – it shows that businesses are not growing rapidly enough to produce adequate tax revenues; nor are they generating new jobs! Also, with falling tax revenues, the states are forced to slash their budgets. According Gov. Jim Douglas of Vermont, who is chairman of the Governors’ Association, 43 states had to cut their budgets by $ 31 billion in 2009; and, for the next fiscal year, 36 states have been forced to cut $ 55 billion from their budgets. These budget cuts obviously mean a significant reduction in the services offered at the state level, which can only add to the difficulties of ordinary citizens. While the weak economic recovery and the budget cuts at the state level affect the entire population, they are of particular significance to the school- and college-going generation. When state-level budgets are slashed, it is often the funding for education and related services that is among the first to be affected. So, it is quite likely that state subsidies to individual school districts will see a substantial reduction. While the reduction in subsidies will affect all school districts, it is particularly bad for the poor urban areas, which will find it impossible to make up the funding gap by raising property taxes. Funding for state universities could be slashed, which can lead to the cutting or reduction of various education and research programs, or it may force the universities to substantially raise their fees. Financial aid to needy students, merit scholarships, and various other forms of financial help the students benefit from could see a drastic reduction, making it difficult, if not impossible, for many deserving students to pursue college education. This is particularly unfortunate, since, in the present age of “outsourcing,” it is only via affordable and high-quality education that America will be able to maintain its competitive edge. The weak recovery and its failure to generate well-paying jobs do not bode well for the soon-to-graduate students either. Many will have to wait longer to get a job of their liking, or may have to settle for less. We do need a strong and roaring economy to get out of the present malaise, and, in spite of a few positive signs, it just doesn’t seem to be on the horizon. What can be done to get the economy going once again? It is not as if we haven’t been in a similar situation before. We were in a great depression in the 1930’s, and we know what brought us out of it. A theory for recovery that has proven effective in practice exists. The problem is it has become impossible to effectively implement that solution in the current polarized state of politics. What brought us out of the great depression of the 1930’s was a massive infusion of funds into the economy by the federal government including large public works projects and job creation programs. In other words, when recession caused a large drop in consumer spending that keeps the economy going in normal times, only a massive financial stimulus by the federal government could get it going again. Well, we have had our “stimulus” this time as well. Then why doesn’t it seem to be working? It is possible that it’s a little too early to judge whether the stimulus has really been effective. However, signs are that it has not been quite adequate. This was exactly the point that liberal economists like Paul Krugman were raising when the stimulus package was making its reluctant progress through Congress. President Obama and his economic team had the right ideas about the size and shape of the stimulus package; however, after all the political compromises that were made in the course of its passage, what emerged was a highly weakened version that managed to disappoint every one! Many on the right wing discovered the virtue of deficit reduction exactly when a strong push via deficit financing is what is needed to bring the economy out of recession! True, we need to live within our means in the long term; however, there is no alternative to deficit financing during recessions. If the current rate of recovery does not improve in the near future, perhaps another round of stimulus might be needed. Do you think it is even possible in the present political atmosphere? This is a rather sad comment on our present-day politics where scoring political points and grabbing power seems more important than the well-being of the nation.
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