With unemployment continuing high and large projected state budget shortfalls, lawmakers in Olympia are facing tough decisions among competing needs and interests. The following basic principles can help guide those decisions in ways that help stimulate – or at least avoid further harming – our state economy.
Part I. Principles of Economic Stimulus
During times of economic recession government revenues decline and demand for government services increase. Increasing, or at least maintaining government spending during an economic downturn can help an economy revive by providing jobs and creating demand for goods and services throughout the local economy. Ideally, government should be able to deficit spend in times of recession and then pay off accumulated debt during periods of economic growth.1 Unfortunately most states, including Washington, are bound by balanced budget laws which forbid state deficit spending. Another option is for the federal government (which can deficit spend) to increase assistance to states during periods of economic decline. However, in the current political climate such a strategy is unlikely. As a result, states like Washington are left with two options for dealing with the current state budget crisis: raise taxes or reduce spending. Not all spending and cutting decisions have the same effects on the economy. In general, it would be better for Washington state’s economy to increase tax and maintain state services, particularly if tax increases are targeted at higher income taxpayers, than to slash state spending.
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