Tuesday, January 11, 2011

Business Political Power: The Fate of Public and Social Services During Recessions

In the United States, one of the casualties of every major recession has long been public and social services delivered by state and local governments, because of budget crises at the state and local levels. There is not one iota of economic necessity for this recurring pattern in the United States. It is not an "economic" problem at all. There is no lack of real resources; what is lacking is flexibly expanded financing to keep existing resources in use.

Recessions cause tax revenues of those governments to plummet downward and expenditures, for unemployment insurance and other social measures, to spike upward.

In recent decades, many states have adopted "balanced budget" amendments to their constitutions imposing restrictions on state borrowing that apply even during recessions. These "reforms" have been spearheaded by the business community and the Republican Party, but Democrats, in order to show their support for "fiscal responsibility," have widely supported these moves, and have not acted to reverse them. These state constitutional provisions, unless offset, guarantee that every major recession will create a wave of state, and therefore local, budget crises that, in turn, will force cuts in dozens of types of public and social services and all the social chaos this entails.

Within much of the business community, this is of little concern, because many of these services are viewed as "waste" and are precisely among the targets of the call for "smaller government." They are viewed as the tail of the "real" economy that can wag up and down with the business cycle with no "real" damage to society, because society is viewed, in the first place, not as a community, but as a playground for private investors to seek personal enrichment.

State governments during times of prosperity typically seek to build up reserves with which to ride out the effect of the next recession on their tax revenues. But during a deep and prolonged recession these reserves tend to be exhausted, and budget crises ensue. Then any effort to "balance" these budgets will push the regional or local economy deeper into recession; if taxes are raised, consumer purchasing power is reduced; if expenditures are cut, public sector employees are laid off, reducing consumer purchasing power, and when state and local government agencies cut back their operations they reduce their orders for goods and services from the private sector, which likewise pushes the economy further into recession. These things, then, in turn, reduce state and local tax revenues further.

There is thus a circular interaction of the public and private sectors at the state and local levels--unless this interaction is severed.

One option is for states to repeal or loosen these "balanced-budget" constitutional provisions so they can protect such services during recessions by sufficient borrowing. But this is hopelessly unreliable.

The most effective approach, by far, and the simplest and cheapest, is for the federal government to make offset grants to state and local governments that fully compensate them for the declines in their tax revenues that are caused specifically by recessions, and to do this under permanent legislation that takes effect by automatic formula.

Part of this approach, in fact, has long been used in the United States, and has been used by the Obama administration, under an established designation called ARFA (Anti-Recession Fiscal Assistance). This action by the Obama administration reportedly has offset about one-third of the effect of the recent recession on state and local tax revenues, and a chorus of economists has urged that additional federal action offset the other two thirds.

If this is not done, then state and local governments will (mindlessly) go about attempting to "balance" their budgets--by cutting services and/or raising taxes. These efforts disrupt such services and push the economy back toward recession, and thus undercut stimulus measures taken at the federal level. This is one of the factors causing the current weak recovery.

In the United States, a huge part of the business community has the central and steady aim of discrediting use of government for popular well-being, and uses massive propaganda to exploit popular ignorance of basic economic facts. Its power over public opinion is indicated by the huge percentage of Americans who believe the federal government's budget should be balanced on an annual basis, without regard to the business cycle, and that budget crises of state and local governments during recessions are caused simply by the "fact" (an ideological position) that "government is spending too much money."

In the United States, the conservative business community is a predatory interest, driven by greed, that perpetually interferes with the conditions for a civilized society.


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