School’s Open, But Funding’s Down

September 1, 2011 at 11:38 am

As a new school year begins, states are providing less funding per student to elementary and high schools than last year (after adjusting for inflation) in 21 of the 24 states for which these data are available, our new analysis finds.  (See first graph.)  These 24 states include about two-thirds of the nation’s school-age population.

School Funding Remains Below 2008 Level in Many States

Funding cuts likely are similarly widespread in the states for which these data aren’t yet available.  The 24 states we studied faced budget shortfalls this year that were no worse than the nation as a whole, on average.

In many cases, the cuts for the current fiscal year (2012) come on top of other cuts in state K-12 funding since the recession hit.  As a result, 17 of the 24 states studied are providing less funding per student than they did in 2008.  (See second graph.)  In ten of these states, funding is down more than 10 percent since 2008, and in South Carolina, Arizona, and California, it is down more than 20 percent.

School Funding Remains Below 2008 Level in Many States These cuts have serious consequences for students and the broader economy.

  • They slow the economic recovery. Between August 2008 and July 2011, local school districts cut 229,000 jobs in response to funding reductions.  These job losses, and other state spending cuts, have reduced overall consumption and slowed the recovery.
  • They inhibit education reform efforts and damage the nation’s long-term competitiveness. Funding reductions counteract state and local efforts to improve teacher quality, increase student learning time, and boost student achievement in other ways.  At a time when the United States is trying to produce more workers with the skills to master new technologies and adapt to the complexities of a global economy, large cuts in funding for basic education threaten
    to undermine a crucial building block for future prosperity.
  • They leave school districts with few choices for restoring the lost aid. State funding makes up 47 percent of K-12 expenditures nationally.  When school districts face cuts in state funding, they generally must raise additional property tax revenue (an unlikely prospect at a time when property values have
    plummeted), scale back the services they provide, or both.

While the state funding cuts partly reflect the economic downturn, which has depressed state revenues and raised the demand for public services, they also reflect choices by state and federal policymakers.  Most states took a cuts-only approach to closing their budget shortfalls for the current fiscal year, rather than using a more balanced mix of cuts and additional revenues.  And the federal government has failed to extend the emergency education aid it gave states earlier in the downturn, which played a crucial role in limiting the funding cuts to schools across the country.

Michigan’s Mis-Timed TANF Cut

August 31, 2011 at 12:22 pm

A report from the Port Huron Times Herald this week noted that, to help reduce the state’s budget shortfall, Michigan Gov. Rick Snyder is expected to sign legislation to reduce the time that individuals can receive Temporary Assistance for Needy Families (TANF), or welfare, assistance.  The new 48-month limit is expected to cause more than 11,000 people to lose benefits at the October 1 start of the fiscal year.

Meanwhile, Michigan has enacted large tax cuts that will cost more than $1 billion in 2012 alone. Michigan is among 12 other states with budget shortfalls to enact tax cuts, most of them benefitting corporations and high-income individuals. Thus, Michigan is cutting programs for the poor, as a prolonged downturn has significantly hurt struggling families, while giving tax breaks to the wealthy.

Snyder’s expected signature on TANF cuts comes just as my colleague, Donna Pavetti, has explored TANF’s record in providing assistance to needy families all across America a full 15 years after it was created as part of the 1996 welfare reform law.

In a four-part series on our blog, Pavetti noted that while the poverty rate initially declined when the economy was booming and unemployment was extremely low, it started increasing in 2000 and now exceeds its 1996 level. At the same time, the national TANF caseload has declined by 60 percent.

These opposing trends — TANF caseloads going down while poverty is going up — mean that a much smaller share of poor families are receiving the critical assistance that they need as the economy continues to struggle.

In light of these daunting statistics, it is even more unfortunate that states across the country are continuing to make some of the harshest cuts in history to this vital safety net for America’s poorest families.

While budget shortfalls in states must be addressed, budgets should not be balanced on the backs of the most vulnerable.

Food Stamps and Unemployment Insurance Create Jobs in a Weak Economy

August 31, 2011 at 10:57 am

In a recent Wall Street Journal op-ed, Robert Barro dismisses Agriculture Secretary Tom Vilsack’s claim that every dollar spent on food stamps generates $1.84 of economic activity.  Barro claims Secretary Vilsack’s “Keynesian” estimate conflicts with “regular” economics, which he says predicts that increasing transfer payments like food stamps and unemployment insurance (UI) would lead to a decline in economic activity and a fall in employment because they would “motivate less work effort by reducing the reward from working.”

Contrary to Barro’s assertion, however, the Secretary is in good company appealing to Keynesian multiplier analysis under current economic conditions, and Barro’s assessment is implausible.  For example, the Congressional Budget Office has estimated that transfer payments to individuals like the increase in food stamp benefits and additional UI compensation of the 2009 Recovery Act generate between 80 cents and $2.10 for each dollar spent when the Federal Reserve holds short-term interest rates as low as possible (see Table 2 here).  Barro says “there is zero evidence” that deficit-financed transfers increase economic activity and boost employment;” CBO explains why, taken as a whole, the evidence says they do.

Circumstances matter.  When the economy is humming along on all cylinders and unemployment is very low – think the late 1990s – deficit-financed increases in food stamps and UI would not increase economic activity or boost employment.  The multiplier would be essentially zero because the Federal Reserve would raise interest rates in response.  Any rise in demand stimulated by the increase in transfers would be offset by the fall in demand due to higher interest rates.  Barro’s concern about work disincentives could come into play if transfers were exceedingly generous.

That’s not where we are now.  Higher interest rates due to Fed tightening will not likely be a concern anytime soon.  Instead, we face a long period of high unemployment and excess productive capacity.  These are just the circumstances in which transfers will most likely be effective in stimulating demand and creating jobs.

Food stamp and UI recipients spend most of any increase in income they get, and they spend it quickly.  That means more spending at local businesses and more orders for those businesses’ suppliers.  The additional spending generates income for local businesses and their suppliers, and the boost to demand multiplies through the economy.  With nine unemployed workers for every two job openings and businesses generally operating well below full capacity, constraints on expanding production and employment to meet the increased demand should be minimal.  Treasury borrowing costs will continue to be low and we will increase the odds that a real economic recovery will take hold.

I wish we were at a point where further deficit-financed spending would be counterproductive because growth is strong and full employment is in sight.  But, we’re clearly not there yet and it’s bad economic policy – regular or irregular – to pretend otherwise.

New Study Claiming Repatriation Tax Holiday Would Raise, Not Cost, Revenue is Flawed

August 30, 2011 at 12:23 pm

A New Democrat Network (NDN) study claims a dividend repatriation tax holiday (allowing multinational firms to return offshore earnings to the United States at a hugely discounted tax rate) would raise $8.7 billion in revenues over ten years – contrary to the Joint Committee on Taxation’s (JCT) estimate that it would cost $78.7 billion over ten years – but NDN’s study rests on several flawed assumptions.

Most importantly, NDN’s study assumes another repatriation tax holiday would not encourage companies to shift more of their profits offshore (by using accounting practices or moving their “real” economic behavior, such as shifting jobs and manufacturing activity offshore).  In fact, as JCT’s estimates reflect, this profit-shifting incentive is the single biggest reason why a second holiday would lose substantial revenue: “Enactment of a [repatriation holiday] for a second time in seven-year period likely signals to taxpayers that something like [this holiday] will become periodic, if not a permanent, feature of the Code.”  As a result, it “encourages investment and/or earnings to be located overseas.”

Indeed, NDN’s study ignores the evidence that firms, anticipating a second holiday to follow the first one of 2004, have begun to shift their profits overseas at an increasing rate – and at a substantial long-run cost to the U.S. tax base.

We will discuss the flaws of NDN’s study in greater detail in a future paper.  In the meantime, policymakers should be extremely wary of the assumptions on which the NDN study rests.

CBO: Up to 2.9 Million People Owe Their Jobs to the Recovery Act

August 30, 2011 at 11:47 am

A new Congressional Budget Office analysis finds that the 2009 Recovery Act (ARRA) is continuing to save jobs and protect the economy from what would have been a much deeper recession. As we describe in an updated analysis, in the second quarter of 2011 the Recovery Act:

  • increased the number of people employed by between 1.0 million and 2.9 million,
  • increased real GDP by between 0.8 percent and 2.5 percent (see chart below),
  • reduced the unemployment rate by between 0.5 percentage points and 1.6 percentage points (see chart below), and
  • boosted the number of “full-time-equivalent” jobs by between 1.4 million and 4.0 million, both by saving jobs and by boosting the number of hours worked. (Without the Recovery Act, many full-time workers would have been reduced to part-time status and fewer would have worked overtime.)

Gross Domestic Product

Unemployment Rate

For these and other charts on the economy, see our updated chart book.