A month ago, I told you the rebate was the wrong kind of stimulus plan, that the best thing to would to be to give the money to state and local governments. Why? Because the states and municipalities will have to cut spending as property and sales tax revenues plumet. And now, when it’s too late (cuz we already gave out lotsa money), Wall Street wants to adopt the Mad Biologist’s stimulus plan:
That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles….
The $90 billion swing — from more spending to less — could be enough to push down a weak economy to zero growth or less, because state and city spending has accounted for as much as half of total economic growth since last fall. (A robust economy has a growth rate of 3 percent to 4 percent, compared with the 0.9 percent or less of the last two quarters.) The $90 billion would certainly offset most of the $107 billion stimulus package now going out from the federal government to millions of Americans in the form of tax rebate checks. The hope is they will spend this windfall on consumption and in doing so sustain the economy. That might happen — for a while. But with the cutbacks in state and city outlays canceling out the consumption, the next president, struggling to revive a weak economy, will almost certainly have to consider a second stimulus package.
….The answer, even on Wall Street, is often: subsidize the states and cities.
No one listens to the Mad Biologist. Sigh.