The Case For Revenue Sharing

Posted on Monday, August 30, 2010

Published in the NYT

PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.

In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.

In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.

Support for the idea was not confined to Republicans. A leading Democrat, Senator Hubert H. Humphrey, supported it in 1972, saying that federal taxes were more progressive than state and local ones and that federal money could be spent more effectively by people with local knowledge than by “some agency head in Washington.”

General revenue sharing came under attack in the Reagan years, and Congress ended it in 1987, arguing that by breaking the link between taxation and local needs, it encouraged higher taxes.

We are in a different time now. State and local governments are in severe fiscal trouble, and their constitutions often prevent deficit spending. In these circumstances, the federal government, which does not face such constraints, needs to raise revenue for them.

Legislation providing the states with $26 billion, which President Obama signed into law this month, took an important step in this direction. It did not create true general revenue sharing, because it tied the funds to specific needs — mostly hiring teachers and paying for Medicaid. But it did free states to use other resources as they saw fit.

It is time to bring back true general revenue sharing — temporarily — to stimulate the economy. Hundreds of articles in political science and public policy journals have studied past efforts, and analyzed the concept of fiscal federalism, without establishing general revenue sharing as a fundamental pillar of Keynesian stabilization policies. This lapse is understandable: most of these articles were written before the current economic crisis, the most serious since the Great Depression.

The need for a Keynesian revenue-sharing program is clear. After Congress approved stimulus legislation in 2009, Lawrence H. Summers, head of the National Economic Council, said that “it’s harder to spend $300 billion within a year on quality projects than you might think.” And no wonder the task was tough: decision makers in Washington were removed from local needs.

Martin Shubik, a professor of mathematical institutional economics at Yale, has proposed creating a “Federal Employment Reserve Authority,” a permanent agency that would do extensive research and maintain a detailed list of ready-to-go public works projects should a recession come. That’s a great idea, but we do not have such an agency now, and, if we did, it might still suffer from a Washington bias.

Now, local governments are laying off a wide variety of employees, including teachers, police officers and social workers. So why don’t we embrace general revenue sharing? Unfortunately, when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble.

It’s time for the public to assert loftier expectations. We need to respect existing government bureaus and organizations for their ideas, and get down to the business of financing important jobs temporarily, and on a huge scale. This will avert more layoffs, and perhaps give cities and states time to recover to the point they can pay local employees from local revenue.

When the administration of Franklin D. Roosevelt began its vast job creation program in 1933, it had to accept certain practical realities, which limited the immediate stimulus that could be provided. Foremost among them was that the government had to work largely within the framework of existing organizations — whether state and local governments, the military or nonprofit groups — which provided much of the economy’s infrastructure.

Economic stimulus is not a matter of turning on the money spigot, as some economists are wont to describe it. It is about getting the widespread cooperation of dispersed organizations to provide jobs, at least for as long as the economy is weak.

When the Roosevelt administration and Congress created the Civilian Conservation Corps in 1933, it was done within the framework of the Army. There seemed to be no other organization that could move hundreds of thousands of young men into wilderness encampments where they could work on conservation efforts. But the Roosevelt C.C.C. placed no more than a half-million people in jobs. We need to reach further than that.

Labor unions, which represent workers who naturally fear displacement by people in new jobs, might seem to be an obstacle. But unions do have an idealistic base, and working union members have sons and daughters and friends and relatives who are unemployed. The unions need to be consulted if new jobs are to be created in a relatively nonthreatening way. In a savvy move, President Roosevelt made a union leader the head of the C.C.C.

The concept of general revenue sharing can also be extended to the nation’s nonprofits, including charities and foundations. The government has long given support to such organizations, but usually in the form of narrow grants. But broader general revenue grants could be made in times like these.

Millions of people need jobs, and there are organizations that could help put them to work. It’s time to move forward.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

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