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The Place for New York Policy and politics

Citizens Union

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The Obama Stimulus: An $825 Billion First Step

Gotham Gazette

The Place for New York Policy and politics

Citizens Union
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For More on Helping New York's Economy

Paying Attention to Cities By Jonathan Bowles
After years of federal policies neglecting urban areas, Barack Obama has sent some encouraging signals that he understands their importance. Certainly, New York could use a helping hand. The director of the Center for an Urban Future lays out some ideas for what the president could do to aid New York.

Using the Crisis to Prevent the Next One By J. Mijin Cha
The current turmoil can help us reduce our dependence on Wall Street and create good "green collar" jobs that help fuel a resurgence of the middle class. The director of campaign research at the Urban Agenda explains how.

Infrastructure Investments that Make Sense By Carter Craft
As big as the stimulus package may be, the country has to invest the money wisely. An urban planner offers some novel ideas for New York projects -- from recycling grease to ferries for freight.

From Gas-Guzzling Cars to Clean Buses By Charles Stone
Simply lending funds to struggling auto companies won't spur economic growth. Instead, an economist suggests, the government should create a voucher program to deploy the resources of the auto companies, spur investment -- and help the environment.

Previous Articles
A Federal Stimulus for City Parks By Anne Schwartz
Advocates hope that President Obama and Congress will recognize that funding parks would not only improve the quality of life and the environment but also spur investment and raise real estate values.

Stimulus Money: The Downturn's Silver Lining? By Graham Beck
The stimulus package could offer more federal funds for transportation projects. The MTA is making its list, but there are sure to be lots of restrictions -- and competition.

The version of the American Recovery and Reinvestment Plan unveiled on Jan. 15 by House Democrats is breathtaking in its scope and cost. Intended to retain and create 3.7 million jobs over the next two years, the $825 billion package of federal government investments includes dozens of spending measures ranging from $200 billion in fiscal relief to help state and local governments, to $6 billion to extend broadband to rural areas, a 21st century version of Depression-era rural electrification. Two thirds of the total value consists of spending, with one third for tax cuts.

Negotiated with President Barack Obama's transition team, the plan - a.k.a. Stimulus II or ARRP - is an important first step to halt the downward economic spiral triggered by last fall's financial meltdown. As large as it is, though-5 percent of gross domestic product-it is not sufficient to create a sustained recovery. Two other steps are essential. First, more dramatic action is needed to put the brakes on the collapsing housing market. Second, making a recovery sustainable will require a set of policies to lift wages and bolster the middle class. Without these two complementary steps, ARRP might provide temporary relief for our economic illness but not a cure.

Helping the States

Whatever its limitations as a long-term solution, ARRP will provide much-welcome short-term budget relief for New York and other states (45 states face budget gaps). The plan will increase the federal share of Medicaid spending and provide billions in education aid to states and school districts. Both of these measures will help to moderate the severe budget cuts proposed by Gov. David Paterson. New York State should receive upward of $10 billion - and possibly as much as $15 billion - over two years -- funds that will help close the state's budget gaps. Such federal relief will help states maintain their spending and prevent spending cuts or tax increases, both of which would have intensified the downward economic spiral.

Help for a Teetering Economy

A year ago, Congress and the Bush administration agreed to a $150 billion stimulus package that consisted largely of tax rebates. Most economists now agree that last year's stimulus was not up to the task because tax cuts provide less "economic bang for the buck" than most other forms of stimulus. Economic forecaster Mark Zandi, a former advisor to presidential candidate John McCain, estimates that every dollar in tax cuts generates only $1.01 in economic activity, much lower than the spending impact of increasing unemployment compensation ($1.63), state fiscal relief ($1.38) or spending on infrastructure ($1.59). Also, since the tax rebate checks were sent out in May and June, when gasoline prices were skyrocketing, many recipients spent the money to cover their gas costs.

The magnitude of a proposed second stimulus has mounted steadily since last September's financial market meltdown and the ensuing sharp collapse in the consumer spending that accounts for 70 percent of demand in the economy. The spending collapse was compounded by a credit market freeze as Wall Street firms and banks confronted a mountain of bad debts created by high-risk lending and unregulated gambling. The crash of the housing and stock markets destroyed literally trillions in home equity and retirement savings held by millions of middle class households. Along with steadily mounting job losses, this caused households to sharply reduce spending. The collapse of consumer spending is thought to have pulled GDP down by as much as 5 percent during the fourth quarter of 2008.

It is no exaggeration to say that this is the worst economy since the Great Depression. The 2.6 million jobs lost in 2008 were more than in any year since 1945. Overall unemployment could be 9 percent by the end of the year and 11 percent in 2010 in the absence of the recovery plan, according to economist Zandi. Already, unemployment among adult black men is 13.4 percent. Housing prices have fallen 25 percent on average. There were 2.25 million home mortgage foreclosures last year, and one out of every six homeowners owes more on their mortgage than their house is worth.

What Stimulus II Would Do

The proposed American Recovery and Reinvestment Plan is a 21st century version of a government-led recovery and investment program, combining some of the best elements of the Depression-era Works Progress Administration, the Eisenhower era commitment to build the Interstate Highway System, the Apollo Project, and the Great Society. The plan includes spending that will not only provide some short-term stimulus but will increase the long-term productive capacity or efficiency of the economy.

One of the biggest components is $52 billion for various "green jobs" programs from weatherizing public buildings (see related story) and homes to reduce energy demand, to developing a "smart" electric power grid that is both more reliable and better able to transmit clean, renewable energy.

The package would also create jobs by spending $67 billion for infrastructure. Because of the urgent need to boost jobs as quickly as possible, it emphasizes "shovel ready" projects, including mass transit systems, highways, bridges, airports, national parks, water and sewer systems, flood control, and environmental cleanup. The Metropolitan Transit Authority will be able to use some of these monies to fund some of the construction projects and equipment needs in its capital budget. Governor David Paterson submitted an extensive list of 1,922 "ready-to-go" projects to the Obama transition team.

This second stimulus package provides $12 billion to support forward-looking research and development investments that could be particularly important in the future, including biomedical, climate change and alternative energy research, and funds to modernize and expand government and university research facilities.

The ARRP includes $5 billion for job training and employment services, including $1.2 billion to create 1 million summer jobs for youth. It offers additional -- and substantial funds -- for worker training and education as part of the education, healthcare, and science and technology initiatives. There is $5 billion for early childhood development, including additional slots in subsidized childcare and Head Start.

A particularly critical part of ARRP is aid to the unemployed. The program includes $36 billion to extend and modestly increase unemployment benefits, and incentives to encourage states to expand unemployment insurance coverage for low-wage and part-time workers. An additional $30 billion would subsidize health coverage for unemployed workers and provide 100 percent federal funding (i.e., dropping the requirement for a state match) for two years for Medicaid-eligible workers who become unemployed.

Nearly $30 billion would go to increase food stamps, low-income heating assistance, assistance provided under federal Supplemental Security Income, aid for the homeless and Temporary Assistance for Needy Families block grants. A total of more than $11 billion would fund repair and modernization of public housing, help communities build and rehabilitate low-income housing using green technologies, and enable communities to purchase and rehabilitate foreclosed and vacant properties.

Stimulus II and New York

New York's unemployed workers, their families, the state government and local governments and the broader New York economy will benefit significantly from this much-needed and unprecedented economic recovery plan. New York, though, must make sure that the billions of federal dollars it will receive for infrastructure, energy development and other projects lead to the creation of good jobs that provide decent wages, benefits and career development opportunities. This plan also presents New York with a golden opportunity to develop a strategic plan to revitalize the upstate economy and help the downstate economy adjust to a permanently smaller role for the finance sector.

Stopping the Housing Collapse

The Obama team has suggested ways to use some of the remaining funds from the $700 billion Emergency Economic Stabilization Act, the so-called "bailout" that was passed in early October, to address the housing crisis. In a Jan. 15 to Congress, Larry Summers, who is to be director of the National Economic Council, indicated the new administration would commit $50 billion to $100 billion to "reduce the number of preventable foreclosures," reform bankruptcy laws, revamp the modest Hope for Homeowners program, and require banks receiving bailout assistance to "implement mortgage foreclosure mitigation" programs.

These measures can only help but may well not be sufficient to ensure that banks renegotiate mortgages on the scale necessary to halt the slide in housing prices. Until that happens, housing prices may fall further and the value of the mortgages and mortgage-backed assets that dominate the balance sheets of the major financial institutions will remain questionable. Investor's suspicions about the "toxicity" of these assets have paralyzed credit markets for most of the past year.

Originally, the $700 billion financial "bailout" was supposed to take those toxic assets off the hands of the banks, under the Trouble Asset Recovery Program or TARP. Some of the remaining $350 billion could be used for this. Now, though, the incoming Obama administration appears to be considering whether to provide another round of massive funding ($1 trillion or more) to salvage bank portfolios.

Given the magnitude and character of the federal interventions so far, the banking system already has been effectively nationalized and is "private" in name only. While the government has allowed bank executives to remain in control, at some point, Washington leaders will have to decide whether taxpayers might be better served by completing the nationalization of the banking system rather than trying to revive banks that have impaled themselves on massive amounts of toxic assets. To date, the overall magnitude of taxpayer resources pledged to financial market rescue can only be described as "galactic" -- $7 trillion to $8 trillion in capital infusions, low-interest loans and federal guarantees.

Boosting the Middle Class

Along with the dual collapse of the housing and financial markets, the middle class squeeze played a major role the current economic precariousness. Wages have not kept pace with productivity or with the health and retirement security costs employers have shifted to workers. As a result, the average working family has been forced to take on substantial home equity or credit card debt in recent years to try to maintain living standards. The absence of a firm foundation for middle class prosperity meant that economic growth from 2003 to 2007 was possible only because of the economy's bubble tendency and the excessive reliance on borrowing at every level.

Boosting the middle class through higher wages and increased economic security involves such things as passage of the Employee Free Choice Act that will remove barriers imposed by the current labor law system that frustrate workers' efforts to join unions.

The American Recovery and Reinvestment Program is an essential step for the U.S. to take in pulling the economy out of this historic slump. As the House leadership's version of ARRP is negotiated in the House and with the Senate, it is critical that the provisions aiding states and low-income populations remain the centerpiece and that any business tax cuts be limited. To achieve a balanced and long-lasting prosperity, however, other actions will be needed to resolve the housing crisis and to rebuild the middle class. Without such policies, the recovery and reinvestment plan might create a short-term rebound but one that will fizzle out after two or three years.

The new administration gives every indication that it is aware of the need for these complementary actions. Time will tell whether it can achieve initial success on the economic recovery front and build the political support to turn recovery into sustained prosperity.

James Parrott is deputy director and chief economist of the Fiscal Policy Institute. He has been studying and writing about the New York economy since he landed in New York City a quarter century ago.

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Gotham Gazette

The Place for New York Policy and politics

Gotham Gazette is published by Citizens Union Foundation and is made possible by support from the Robert Sterling Clark Foundation, the John S. and James L. Knight Foundation, the Altman Foundation,the Fund for the City of New York and donors to Citizens Union Foundation. Please consider supporting Citizens Union Foundation's public education programs. Critical early support to Gotham Gazette was provided by the Charles H. Revson Foundation, Rockefeller Brothers Fund and the Alfred P. Sloan Foundation.

Avoiding the Next Crisis

By Marcia Van Wagner

New York City has faced hard times before, but by at least one measure, the situation confronting Mayor Bloomberg is more serious than any in 25 years. As daunting as the $4 billion to $5 billion budget gap for fiscal year 2003 is, however, an array of measures, beyond simply slashing budgets or boosting taxes, can provide some relief.

To get a sense of the scale of the problem, the Citizens Budget Commission calculated the budget gap as a percentage of total city-funded expenditures. By that measure, the city faced its largest shortfall in 1976 when the gap would have equaled 19 percent of all city-funded expenditures by current accounting methods. Since then, other mayors have faced large gaps but none as severe as the one facing Mayor Bloomberg. Estimates vary, but he confronts a shortfall for next fiscal year equivalent to 13 to 16 percent of city-funded expenditures.

What have other mayors done about their gaps of eight, nine or even 12 percent? In Ed Koch's first term, he cut spending by 15 percent. Rudolph Giuliani also reduced spending. There were tax increases in Koch's first term, and David Dinkins raised taxes considerably, partly to pay for extra policing. In the past, some mayors, particularly Koch in the 1970s, received help from the state. That, though, is unlikely to occur again.

Spending cuts and tax hikes remain options for Mayor Bloomberg. However, he ruled out tax increases in his inaugural speech. For the most part, this makes sense, since New York City already places a higher tax burden on businesses and residents than almost any other U.S. city.

What's left? First, there are a couple of easy things the mayor might do. For example, he can use the so-called personnel service accrual funds, money that has been earmarked for positions that have not been filled.

He can try to find some one-shots, revenue measures that can apply to the current year's budget but don't have any recurring value. For example, in the past the government has sold some of its assets, such as the UN Plaza Hotel and WNYC. The city has been criticized roundly by many of us for doing that, but one shots are not all inherently bad if they are pursued as part of a larger plan to achieve recurring budget balance.

Then come things such as further service cuts for libraries that have already had to scale back their hours and other cultural institutions. But the entire budget for these areas total only $1.6 billion

Often in the past, the city had to flail about filling budget gaps as revenue and spending predictions changed. Such constant scrambling to simply get through each week creates panic and makes it hard to arrive at good decisions.

BEYOND TAX AND CUT

To avoid that, there are practices the city should adopt to close not just the current budget gap - but future ones as well. As a guiding principle, officials should keep their eyes on the prize. The typical city budget looks four years ahead. Over that period, you want to see a balanced budget with a competitive tax system. And you want to be efficiently delivering quality services to satisfied residents.

Here are some specifics.

  • Shift some responsibilities back to the state: Part of what makes our taxes high is that New York State places heavier mandates on localities than virtually any other state in the nation. This includes a large portion of Medicaid costs. So, the first proposal is to simply place a greater part of the burden for funding the safety net -- Medicaid and public assistance -- on the broader tax base of the state. This would save perhaps about $1.3 billion a year since city residents would still be contributing to Medicaid through their normal state tax payments. Admittedly the state is having budget problems of its own right now but this is the right thing to do.
  • Explore tax sharing with New Jersey for transportation: Some of that already exists through the Port Authority. Doing more to broaden the regional tax base for transportation would take some of the burden off New York City economy.
  • Bring back the commuter tax: The tax was 0.45 percent of a worker's wages, worth a total of about $500 million a year. The state legislature decided to eliminate it. It is time to reverse that. The commuter tax is not anti competitive, and its demise certainly left a big hole in our budget.
  • Promote productivity: This entails many different things including pay policy. If wages were set more in accord with labor market conditions, the city could pay more to workers whose skills are in short supply and less to those where applicants for positions far outnumber the number of available jobs. This would help the city get quality workers and increase flexibility for managers.

We also need to create incentives for city workers to find better ways to do things and institute merit pay to reward people for a job well done. Now, there are basically no incentives for people to excel in their jobs:

  • Modernize the health insurance program for municipal workers: By requiring employees to contribute some portion of health-care costs, the city would simply be conforming with the practices of many other states and localities.
  • Develop a smarter capital program: That means keeping facilities open for longer hours where appropriate and better maintaining existing facilities.
  • Operate new construction projects more efficiently: The state Wicks law, which requires public entities to hire multiple subcontractors, is a major barrier to this and should be repealed. The city has estimated this law raises the cost of capital projects by about 14 percent.
  • Set new state limits on borrowing for municipal projects: All too often the city sees borrowing for capital projects as an unlimited source of funds. A new state constitutional amendment placing clear, comprehensive and realistic limits on such borrowing would provide a clear incentive for better capital planing and help ensure that municipal borrowing would not get out of hand.

These measures do not provide a quick or painless solution to New York's current budget problems. But taken together, they could help ease the current problems and, perhaps more importantly, help keep us from confronting new and perhaps even bigger gaps in the years to come.

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Click here to view the entire Citizens Budget Commission report, "Managing the Budget in the Bloomberg Administration." (in pdf format)

Marcia Van Wagner is chief economist for the Citizens Budget Commission.

See "The Case For Raising Revenues" by Mike Musuraca

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Gotham Gazette is published by Citizens Union Foundation and is made possible by support from the Robert Sterling Clark Foundation, the John S. and James L. Knight Foundation, the Altman Foundation,the Fund for the City of New York and donors to Citizens Union Foundation. Please consider supporting Citizens Union Foundation's public education programs. Critical early support to Gotham Gazette was provided by the Charles H. Revson Foundation, Rockefeller Brothers Fund and the Alfred P. Sloan Foundation.

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