The Palmetto Insider

The blog of the South Carolina Policy Council

Stimulus Wreaking Havoc with Agency Budgets

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As it becomes clear that the Obama stimulus package is not quite working, it is a good time to assess what impact the stimulus is having here in South Carolina. As you may recall, the argument made by the legislature was that the stimulus was absolutely necessary to save teaching and law enforcement positions. Gov. Sanford had instead proposed using the one-time money to help pay down part of the state’s $8.2 billion debt.

It’s been three months since that debate was settled by a State Supreme Court decision. So what impact is the stimulus having?

To begin with, let’s dispense with the fiction that the stimulus had all that much to do with saving essential teaching and law enforcement positions. It didn’t. Rather, it was an easy way out for legislators who wanted to avoid making targeted cuts to the state budget.

On top of that the stimulus is causing waste, confusion and uncertainty – at least according to those agencies still waiting on funding.

Calls made to several agencies – including the Arts Commission, Forestry Commission and Department of Natural Resources – found that the stimulus is preventing budget planners from moving ahead with top priorities because they don’t know when they will receive the anticipated funding.

Here are several typical responses:

  • “Nobody seems to know when the money is coming.”
  • “No clue when the money is coming.”
  • “Heard several different dates, have tried to find out several times.”
  • “Could be as late as November.”
  • “We don’t know what we can use it for.”
  • “Not sure about how to report the results [of how the stimulus money is spent].”

This uncertainty suggests two things. First, rushing through the $787 billion stimulus package was a bad idea. President Obama and the Congress should have waited and carefully planned how best to use and distribute these funds. Of course, the best option would have been not to pass a stimulus package at all, especially given the negative impact of federal tax increases on private investment. As Harvard economist Martin Feldstein has demonstrated, for every $1 increase in federal taxes, $1.76 is destroyed in private sector activity.

Second, state lawmakers should have acknowledged the stimulus was not the cure-all they said it was.

Of course, when legislators were politicking for this money back in May, we never heard any mention of how long it would take to actually distribute the stimulus dollars to specific agencies.

Regime uncertainty is a phrase coined by economist Robert Higgs. It refers to the idea that private markets suffer when rules surrounding property rights are in flux. Higgs’ theory can likewise be applied to government activities as well. Uncertain funding creates confusion, inefficiency and waste.

More to the point, if state agencies are continuing to provide necessary services without stimulus dollars, was the stimulus really necessary in the first place?

Clearly, the answer is no. But in addition, a stimulus package we didn’t really need is causing budgetary and planning headaches for many agencies.

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Written by Geoff Pallay

September 14, 2009 at 10:10 am

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