At his press conference Monday, President Obama made a point some of you may find startling: The federal deficit will expand regardless of whether Congress passes an economic stimulus bill.
"My administration inherited a deficit of over $1 trillion,'' the president said, "but because we also inherited the most profound economic emergency since the Great Depression, doing a little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence. Those are deficits that could turn a crisis into a catastrophe.'' (emphasis added)
How could not passing a stimulus make for "even greater deficits''? We see the answer in microcosm right here in South Carolina.
The state's revenue shortfall grows more pronounced as its economy spirals ever downward. S.C. businesses cut back on operations in response to the tightening of credit and the decline in consumer spending. Jobs get shed, resulting in more business losses. The cycle repeats itself.
As the president noted, the rate of job losses has accelerated dramatically the past three months. According to the U.S. Bureau of Labor Statistics, the US. economy shed 380,000 jobs in October, 597,000 in November, 577,000 in December and 598,000 last month. In South Carolina, the jobless ranks have swelled from 152,000 last July to 207,000 at the end of 2008.
When mass layoffs occur, tax revenue for those levels of government that depend on the income tax declines further. This is what's happening here in South Carolina.
No longer is our state's revenue crisis based primarily on the decline of the sales tax, though sales-tax collections continue to lag. Monday's dismal report from the S.C. Board of Economic Advisers, which sets the revenue benchmarks upon which the legislature bases public budgets, focuses now on sharp declines in S.C. income tax collections -- a direct reflection of mounting S.C. job losses. When folks lose their jobs and businesses lose money -- or fold -- income-tax collections inevitably decline.
Most state income-tax systems (including ours) articulate with the federal income tax, and every state is in recession. So it's reasonable to assume that declining income tax collections are increasing the federal deficit -- the gap between revenue and spending. Recessionary times also trigger increased federal spending under existing laws (unemployment payments, welfare payments, etc.). This gap is growing and will continue to do so if Congress does nothing.
Obama's argument (and that of many economists, right to left) is that it is far better for Congress to incur this deficit via intervention in the economy. It is better to attempt to stanch the loss of jobs and create new ones than to stand idly by and allow the downward spiral to grow the deficit anyway. This makes sense.
Either way, you get more red ink. But the stimulus path -- at a minimum -- ensures that some new income-tax revenue will flow into the Treasury as folks return to work (or get to keep their jobs instead of losing them). This intervention, in tandem with banking measures announced Tuesday, could -- could -- restore public confidence while widening the availability of credit, and is better by far than doing nothing. If we will have greater public debt regardless, why not incur that debt in a way that promotes recovery?