Before the mid-2006 collapse of the home price bubble, it stimulated U.S. local and state economies. Private employers, small and large, expanded their payrolls. That growth increased U.S. workers earnings to purchase goods and services. Meanwhile, local and state government revenues rose from sales and property taxes, funding public services.  

 

The proximate cause ending this taxing and spending trend was the collapse of the real estate bubble. This means that an important source of stimulus connected with the bubble has weakened.

 

Few commentators or policymakers, most recently and perhaps even shockingly the former Federal Reserve Chairman Alan Greenspan, foresaw the plunge in the real estate market. One of the few who did predict the housing crash and its prolonged, nasty effects was author and economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC. 

 

The deflating bubble is causing a worsening economic contraction in the private sector. That plunge is also expanding the budget deficits of state and local governments. 

 

State and local lawmakers should do more than deliberate where to cut spending to balance their budgets. My policy recommendation to them is simple.

 

Lobby the federal government to bail out cities and states with grants, not loans. This fiscal policy would eliminate state and local budget deficits that, unchecked, will lead to cascading service cutbacks and job layoffs. That downward spiral will lead to a decline in the lives of America’s working people and their families, and further sour the bottom lines of private firms. We can and should avoid this outcome, given our knowledge of the positive effects from federal spending during downturns. New Deal policies from the depression era to stimulate job creation are a big case in point.  

 

The first step is to define the problem, which is the end of the era of economic stimulus from rising real estate values nationwide. The second step is federal grants for cities and state budgets drowning in red ink.   

 

As federal taxpayers, the American people will, in effect, fund their local and state governments in dire need of more revenue. Such cash infusions for public health care, schools and transit will be a lifeline in these hard times.

 

 

Seth Sandronsky lives and writes in Sacramento. He can be reached at ssandronsky@yahoo.com

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