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October 21, 2008

The Fix We're In: Edward Glaeser on "the silver lining of bleak fiscal times"

With the stock market nosediving, credit lines freezing, retirement savings disappearing overnight, and the state budget on the chopping block, we are facing an economic peril as great as any since the Great Depression.  What are we to make of these frightening times? We asked some leading voices in the world of economics, political science, and public policy to help make sense of the tumult we find ourselves in. See all of them here. Below, economist Edward Glaeser:

As Gov. Patrick tried this week to balance the state budget, he was also balancing his desire to provide social services with the need to respond to a $1.1 billion tax revenue shortfall. A nation can react to a financial crisis by borrowing billions, raising taxes or just printing more money. States have fewer options.  Raising taxes on business and the rich will prod them to locate elsewhere. The Commonwealth hasn’t printed its own currency for quite some time.   

The most natural way for state budgets to address the business cycle would be to borrow during lean years and save during fat ones. After all, it isn’t particularly sensible to cut social services when economic times get tough. The governor’s new budget proposals does a little bit of this kind of “income smoothing,” by drawing down $200 million out of the rainy day fund and by further delaying the date at which our pensions system will be fully funded. However, Article LXII of the state Constitution requires any large scale borrowing to get a two thirds super-majority of the Legislature, which pushes the state government to live, more or less, within its means. 

The silver lining of bleak fiscal times is that they push state leaders to try to trim fat from the state budget.  One of Gov. Patrick’s proposed cuts is a $20 million in “earmark spending” in the Massachusetts Office of Travel and Tourism. And the $22 million cut in Judiciary spending might actually pave the way towards much-needed, and long-discussed, improvements in the administration of our vital court system.

I wish that our leaders worried as much about saving money during booms as they do during busts, but fiscal downturns do make it politically easier to challenge wasteful spending. Even when the money involved is small, eliminating obvious forms of pork helps convince the public that the Commonwealth is being well run.   

However, the governor can’t close a $1 billion-plus shortfall with the rainy day fund and voluntary reductions. More than 70 percent of the state’s spending goes on education and health. Major cuts were always going to have to come from one or both of those two areas. 

In richer times, state politicians divided into spenders (often liberal Democrats) or savers (often more conservative Democrats and Republicans). Spenders usually wanted to strengthen both public education and public healthcare. In this fearful new age of fiscal limitations, the Commonwealth doesn’t have the cash to spend more on everything. Political leaders and eventually voters must make a painful choice: are we going to focus more resources caring for our sick or training our children?   

Gov. Patrick seems to have decided to put schools first. He cut higher education spending substantially, but left state aid to primary and secondary schools largely untouched, except for a $14 million cut in for special education reimbursement. The really big cuts came in healthcare, especially a $200 million reduction in MassHealth spending.

Why did the governor cut medical spending rather than school support? Perhaps he thinks that educating our children is a more important investment for the state’s future than spending on the sick. Perhaps, the governor just accepted that the Legislature was never going to let him cut local aid, and he didn’t want another fight with Speaker DiMasi. My guess is that the real explanation is that governor thought that $200 million could be cut from healthcare reimbursements without any significant reduction in service levels, at least in the short run.   

It may well be right that if these cuts in health care payments paid to providers are relatively short-lived, then hospitals will just soak them up  In the longer run, these cuts will surely create a meaningful reduction in service levels, but I suspect that the state will make up for today’s cuts by boosting healthcare payments in the future. If that is the case, then Massachusetts is actually addressing the fiscal downturn by borrowing after all. We’re just not borrowing from investors; we’re borrowing from hospitals. If the plan is to cut hospital spending today and boost it in a few years, then the state is implicitly using health care providers as its lenders of last resort. It would have been better if the state had saved more during the boom, but since we didn’t, we shouldn’t be surprised that our leaders are trying creative ways to make up for our revenue shortfall.

Edward L. Glaeser is the Fred and Eleanor Glimp Professor of Economics at Harvard Univeristy, where he is also director of the Taubman Center for State and Local Government and director of the Rappaport Institute for Greater Boston.


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