Column: Government spending boosts economy
January 24, 2021
by Beth Giesting, director of the Hawaii Budget & Policy Center
Link to column on Honolulu Star-Advertiser website
As the Legislature convenes, lawmakers will be tasked with addressing the state budget shortfall. How much will the state be spending over the next two years? What services will be supported? Where will the money come from to pay for it all? These questions are all the more significant because state spending plays a crucial role when times are hard.
The Great Recession of 2007-09 taught us a lot about how public spending decisions help or hinder economic recovery. The following lessons should guide lawmakers as they develop a budget for challenging times.
Economic recovery depends on state spending.
When the private sector slows down, the government must step in to keep spending levels on an even keel.
Economists find that, during a recession, $1 in public spending adds between $1.50 and $2 to the economy. In the same way, public spending cuts multiply economic damage.
Cuts made to Hawaii’s spending during the Great Recession have had lasting effects, and studies from other states show that economic recession lingered longest where budgets were reduced, while recovery was fastest where spending remained steady.
Government services help people and the economy.
The pandemic has threatened people’s health, as well as their economic security. In times like these, more people need the safety net of government-supported health care, food, housing and other essentials.
These services are not just essential to the recipients: They also provide a boost to the economy. When people have resources to pay their rent, buy food and go to the doctor, their spending supports local businesses and jobs.
Cutting public worker positions, pay hurts the economy.
Economic recovery starts with supporting jobs. Hawaii has one of the highest unemployment rates in the country; deliberately putting more people out of work through layoffs or furloughs is counterproductive. The furlough proposal would also result in a hit to the economy of as much as $600 million by forcing tens of thousands of public workers to cut their spending.
State service contracts support jobs throughout Hawaii.
The state spends billions of dollars to purchase goods and services in the private sector. Cutting that spending would not only hamper effective government, but deliver a further blow to local businesses.
A lot of that money pays for government’s most important health and human services, many of which are delivered under contracts with private nonprofit organizations. These nonprofits are not only essential providers, but notable employers and economic anchors to the communities they serve. Unfortunately, the state often passes disproportionately deep cuts to their nonprofit contractors when departmental budgets are reduced.
Infrastructure spending supports the economy and builds Hawaii’s future.
Issuing state bonds to pay for capital infrastructure improvements is one of the best strategies to buoy the economy. Studies show that the return on investment was $1.57 for every $1 spent this way during the Great Recession. Construction projects employ people who can then increase their spending, which supports other businesses and jobs.
Expanding and strengthening our infrastructure — broadband, roads, harbors, airports — is the foundation that will support future economic growth.
How should we fund this necessary state spending? Federal aid would help with Hawaii’s economic stimulus needs, and may still be forthcoming in 2021. However, state lawmakers cannot rely on this revenue stream, and should instead use the tools they have now to shore up operating budgets.
Consideration must be given to temporary borrowing, using reserve funds, increasing taxes on the wealthy and imposing moratoriums on certain business tax credits and exemptions.
Hawaii is resilient, and fueled by sufficient funds, the state budget can be the blueprint for a quick recovery.