If you had to take a pay cut or your spouse was laid off, your family probably would respond by eating out less, postponing a vacation, maybe even — I can't believe I'm suggesting this — downgrading to a basic cable package.
In other words, you'd cut expenses, right? For someone earning less money, that would seem the responsible thing to do.
But many economists argue that, where cash-strapped governments are concerned, the smartest course of action can be just the opposite.
Consider the federal government: we're fighting two expensive wars, our national debt is imponderably huge and the economy is clogging the toilet. And yet, a growing contingent of prominent economists – most notably, Nobel Prize-winner Paul Krugman – argue that we actually need to boost federal spending, at least temporarily, in order to stimulate the slumping economy. To cut spending, they say, would further damage the economy, worsening the current financial crisis.
Much the same argument holds for Georgia, argues Alan Essig, executive director of the Georgia Budget and Policy Institute. According to the Georgia State University Economic Forecasting Center, state revenues are projected to fall next year by about $2.5 billion. But Essig says it would be a huge mistake to cut state spending by a similar amount.
"To depend just on budget cuts as a way to get through the economic downturn would be irresponsible," he says. "Cutting the budget will only make things worse. In the short term, it'll put more people out of work, and long-term, it will put Georgia farther behind in making the needed investments to spur economic development."
Right now, things are looking grim in Georgia, economically speaking. Apart from Michigan, with its collapsing auto industry, we've lost more jobs here over the last year – just over 61,000 – than any other state. That's likely a reflection of the fact that so many Georgians have earned their livings from manufacturing, construction and tourism – all old-school industries that have been struggling lately. Efforts to attract high-tech and biomedical companies have never really gotten off the ground.
"The job sectors that seem to be holding up best in Georgia are health care, education and government," Essig says, "but these are the areas where cuts are most likely."
That's because education and health and human services are duties handled by the two largest government departments that, together, claim more than half of all state spending. Gov. Sonny Perdue could close state parks or cut hours at drivers license offices, but if he wants to make a real dent in the state budget, he'll need to trim spending for Medicaid for low-income families, PeachCare for uninsured kids, or public schools.
For the current year, Georgia adopted a record $20 billion budget that didn't include a much-touted plan to fund a statewide trauma care network. If we not only let that program slide again, but cut other health-related spending, Essig says, it could mean the death knell for several hospitals in rural counties. If they go under, the affected communities would lose some of their highest-paying jobs and find themselves unable to attract other industries.
But if Georgia lawmakers don't slash spending, what should they do?
Essig leans to the liberal side. Economics professor James Alm, former dean of the Andrew Young School of Policy Studies, takes a more conservative approach. But they both offer the same answer to the above question: Georgia should raise taxes.
"What local and state governments should do is broaden the tax base by taxing services and food," says Alm, who points to Speaker Glenn Richardson's proposal to tax such services as muffler repairs, haircuts and tax preparation. (Alm, however, thinks Richardson's plan to erase property taxes is a lousy idea.)
Alm also advises that Georgia spend its $1 billion in budget reserves to give the state economy a shot of adrenalin, although he believes government action is only one of many factors that influence economic development.
Finally, Essig recommends the state pass a hefty bond package to fund capital improvements. Georgia typically borrows $1 billion a year for such projects as bridges, roads, sewers and new schools. This year, while interest rates are low, the state should borrow up to twice that amount, he says, a move that would shore up the economy by creating jobs.
"Georgia doesn't have a spending problem," Essig explains. "We have a revenue problem." He says our per-capita tax burden is one of the lowest in the country – and the quality of our health care and education systems is similarly low.
Georgia has continued to enjoy growth in recent years despite having some of the lowest standardized test scores in the country and a relatively feeble public health system. But if lawmakers further cut public investment in education, health care and transportation, Essig warns, they could hurt the state's prospect for future growth.
As chairman of the powerful House Appropriations Committee, Rep. Ben Harbin, R-Evans, could rightly be called Georgia's Master of the Budget. He expects the Legislature to look for places to trim spending, but he agrees the state should try to avoid cutting education and health care.
"I don't think there's any way around making some cuts, but when you have a down economy, demand for social services usually goes up," Harbin says. He also believes there's a chance the governor could float a larger bond package this coming year.
"If we can afford it, I think it would be a good idea to help spur economic development by funding work on roads, ports, schools and other infrastructure needs," he says.
But, he says, there's one recommendation that's a non-starter. "I've been in the Legislature 14 years and I've never heard anyone – Republican or Democrat – really push to raise taxes," Harbin says. "The problem with raising taxes is you hit people when they're already down and you pull more money out of the economy."
Still, he says, lawmakers will likely vote this spring to eliminate the so-called Homeowner Tax Relief Grant, a tax subsidy to local governments that would put $428 million back into state coffers.
Without a significant tax increase or a sizable bond package, Essig isn't sure how the state can keep vital programs on track.
"I don't expect my recommendations to be heeded by the leadership," he says.
