Summary:
New York State has deep fiscal problems and the response has been to propose billions of dollars in budget cuts and cuts to school aid. The mass transit system also plans double-digit percent fare increases, personnel reductions, and service cuts. These may be sound fiscal policy during normal times, but these are not normal times.
During a deep recession, such as the one our nation is experiencing, it’s a time when one should postpone balanced-budgets but instead impose Keynesian economic practices.
(Read full letter below)
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November 23, 2008
The Honorable Governor David A. Paterson
State Capitol
Albany, NY 12224
Dear Governor Paterson:
New York and you, Governor Paterson, are trying to find solutions for the State’s deepening fiscal problems. Some of the proposals that I have read include billions of dollars in cuts to Medicaid and midyear reductions in school aid. The MTA also anticipates a double-digit percent fare increase, personnel reductions, and services cuts. These may be sound fiscal policy during normal times, but these are not normal times. Ordinarily, this type of fiscal prudence would be a welcome philosophy. However, during a deep recession, such as the one our nation is experiencing, it’s a time when you should postpone your sound instinct to impose fiscal prudence and balanced-budgets but instead impose Keynesian economic practices. You can take solace that great leaders have grappled with this same dilemma for centuries.
The first known Keynesian policy is recorded in the bible (Genesis 41:1-57). You may remember this bible story of Pharaoh telling Joseph of his dream about seven fat cows that were devoured by seven lean cows. Joseph interpreted Pharaoh’s dream to mean that that for seven years there will be an economic boom in Egypt which will be followed by seven years of recession. Joseph advised Pharaoh to store grain during the fat times so as to diminish famine during the lean time to follow.
This is one of my favorite bible stories because, although calculus and statistics may help predict the economy (absent divine dreams,) economic policy is often simply common sense. During abundant times one should run surpluses to lessen misery during the lean times. Unfortunately, our modern leaders rarely heed this idea and waste surpluses in the good times to have little surplus to weather a poor economy and thus try to balance budgets during recessions.
Cutting government spending during a recession is, in economic terms, little different than raising taxes during a recession (or storing away grain in a time of famine.) Likewise, subway fare increases are identical to tax increases. The effects of each during lean times spirals our land deeper into recession. As state government cuts aid, local government responds by cutting construction projects, reduce workers and teachers, and cancel maintenance plans, which results in further lessened economic activity and a shrinking tax base which causes state revenue to fall further.
As difficult as it may seem, the pragmatic response to New York’s economic crisis is actually for the State to deficit spend -- borrowing money to spend on necessary infrastructure and aid to local governments and public transit – as long as the State is in recession.
A recent column by Nobel Prize winning economist Paul Krugman underscores the mistakes Franklin D. Roosevelt made in his first years as President to address the Great Depression. Dr. Krugman argues that F.D.R. was too timid in his early attempts to stimulate the economy.
...the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown... conclu[des]: fiscal stimulus was unsuccessful "not because it does not work, but because it was not tried."
...
expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.
Dr. Krugman states in another column:
In normal times, it’s good to worry about the budget deficit — and fiscal responsibility is a virtue we’ll need to relearn as soon as this crisis is past. When depression economics prevails, however, this virtue becomes a vice. F.D.R.’s premature attempt to balance the budget in 1937 almost destroyed the New Deal.
President-Elect Obama has already mentioned that his proposed stimulus package will include money for state and local governments. We in New York do not want to undercut his efforts by instituting spending cuts. On the contrary, we should avoid any measure that may undermine the overall economy.
A New York New Deal should be bolder than merely avoiding cuts to existing services and programs. It should include new programs that are investments in the future. We drive on roads built; we cross rivers on bridges (like the Tri-Borough Robert F. Kennedy Bridge) constructed, and send our children to schools built by FDR’s work programs. Similarly to the 1930s, New York needs infrastructure investments now, which will benefit New Yorkers for years to come. As an example, a 21st Century ‘New Deal’ would focus on energy improvements of public buildings.
I envision a program to install solar photovoltaic panels (which generate electricity) on public school buildings. Apart from the local construction jobs created, for the next several decades school districts around the state will generate part of their own electricity – reducing their operating costs. (As an aside, schools are ideal for solar electrical generation as schools are generally empty during the summers when peak electrical demand is the highest. Thus, they lighten the load placed on the electrical grid.)
In addition, many of our public buildings, especially schools, were build before heat lose was a consideration. A program to improve insulation in public buildings will reduce our expenditure on heating fuels and save the public sector money otherwise spent on heating oil, gas, and electricity.
To assure that New York’s economy gets the greatest stimulus, you may want to take measures to assure that monies are spent in New York State, with firms doing business in New York and who hire New Yorkers.
What I want to stress is to avoid making short-term decisions that worsen the economy in the long run. I believe that our incoming President has a vision to tackle the country’s economic woes. Cutting State spending during a recession weakens New York’s economy and undermines national efforts to lift it. Your focus should not be limited to balancing New York’s budget but should be to engineer an economic recovery in the State that will be remembered for decades to come.
Respectfully,
Joel Peskoff