DN: Medicaid cuts will cause a downward spiral

by Doron Taussig

Published Jun. 9, 2010, 9:20 a.m. ET

Yesterday, Ben highlighted Congress's threat to defeat an extension of Medicaid funding, and asked this question:

Are political leaders in DC really prepared to blow a huge hole in state budgets? It seems like the desire to maintain fiscal discipline could be counterproductive in the short-term. What do you think? Do we need to keep spending levels up to help get out of the recession? Or would it be better for Pennsylvania and other states to lay off thousands of employees?

Actually that's several questions. And today's DN editorial offers an answer for all of them: Basically, this would be bad.

If the money isn't restored, Pennsylvania will have $850 million less to balance a state budget that is already $1.2 billion in the red.

As Gov. Rendell wrote to Pennsylvania's representatives in April, the unexpected drop in income would necessitate cutting payments to private hospitals, nursing homes and doctors; eliminating all state money for treating substance abuse and homelessness; cutting funding for domestic-violence prevention by a half and for child welfare by a quarter.

And the pain of cutting an estimated 20,000 jobs from the state budget won't be limited to the public employees who have become convenient,not-always-deserved punching bags during the Great Recession. The negative effects would ripple outward to include private companies that do work for the state, as well as the workers who make the goods or provide the services the unemployed won't be buying.

"It would actually kill everything the stimulus has done," Rendell told the New York Times this week. "It would be enormously destructive."

The punchline is that this move might not even accomplish its stated goal of reducing the deficit.

On a national level, the Medicaid money represents less than a 1 percent increase in the deficit, but the effect of losing 900,000 jobs nationwide as states make cuts like Pennyslvania's (an estimate from the Center on Budget and Policy Priorities) would increase the budget far more. People who get laid off do not pay as much in state income taxes. They cut back on their purchases, which means they don't pay sales taxes. State revenue goes down, the deficit goes up, the state budget has to be cut some more, layoffs are increased and the spiral continues downward.

This shouldn't be taken as an argument against reducing any government spending at any level. But massive cutbacks like this, at this moment -- by the Feds, who can afford more latitude in terms of deficits -- does sound ill-advised.