State government in better shape to handle Great Disruption than it was during Great Depression

It shows how much America has changed since the Great Depression that Gov. Christine Gregoire could even offer a $300 million economic stimulus.

The tiny state governments of the early 1930s were overwhelmed by the calamity. As shantytowns named Hoovervilles after the president were cobbled together by the unemployed, meager local and state relief funds quickly ran out.

Today's large state governments are much better prepared to ease the crisis.

That won't end the debate over the proper size, efficiency or role of government, but nobody should be wishing for a supposed golden age that never existed.

In Washington's case, Gregoire is speeding up the release of federal funds already allocated for winterizing low-income homes and helping with energy bills.

Other money will go to the salmon fishery and for tax-exempt bonds to help with housing. These measures will provide some immediate bread-and-butter relief, from jobs to assistance with at-risk mortgages.

But troubles may only be beginning for state governments, which will be one of the epicenters for what New York University economist Nouriel Roubini predicts will be the "most severe recession since World War II, much worse and longer and deeper than even the 1974-75 and 1980-82 recessions."

Roubini was one of the few prominent economists to correctly call the timing and destruction of the housing downturn.

That downturn and all of its consequences have sapped the economic activity that pays taxes. And now, ominously, consumer spending is pulling back drastically, shredding sales-tax outlooks.

According to data from the Rockefeller Institute of Government, tax revenues for states fell an inflation-adjusted 2.6 percent in the third quarter. This as the need for government assistance is growing.

Washington faces a $5 billion budget hole, up from $3.2 billion projected last month. The state is losing the Teflon that protected it during the first year of the national economic mess.

The National Conference of State Legislatures reports that 31 states collectively addressed $40 billion worth of deficits for fiscal 2009, three times the amount in fiscal 2008 budgets.

California faces a fresh $11 billion deficit, just two months after closing a $15 billion gap. Massachusetts was forced to close a $223 million shortfall. In New York, epicenter of the financial collapse, the red ink for next year will be $12.5 billion.

Layoffs close to home

And the worst is not over, certainly not for Washington. For example, the loss of Washington Mutual's headquarters in downtown Seattle has yet to be felt.

Manufacturers are cutting back, as evidenced by the 430 layoffs at Paccar's Kenworth plant in Renton.

Exports, once seen as a hedge against the domestic slowdown, are being hindered as the economic downturn spreads worldwide. The contagion has also begun to spread to the tech sector.

The affluent Puget Sound region may ride out the worst of the downturn with relatively minor damage, although that's not a given. Other regions of the state, already the worry zone of the other Washington, may be set further behind.

This will put the budgetmeisters in Olympia in a difficult bind.

Deficits not allowed

Unlike the federal government, the state is prohibited from running deficits. So the Gregoire stimulus will soon be replaced by serious belt-tightening.

This sounds fine in the abstract: Families are having to cut back and so should government. It plays out differently in real life. Budget cuts often affect programs that help the most vulnerable, including those families cutting their personal budgets.

They lead to layoffs of government workers who land in a job market where the private sector is cutting back. Contracts are curtailed with private businesses that depend on the government as a customer.

A stealth danger comes if policymakers grow shortsighted about competitiveness. State government should be an asset in a world with billions of capitalists vying for the economic pinnacle most Americans took as a birthright only a generation ago.

Government leadership is more important than ever. The Puget Sound region, especially, has been blessed with private-sector leaders and philanthropists. That's eroding with the loss or cutbacks of some key companies, while many of the survivors are focused on navigating the rough economy.

For a time, government leaders seemed almost irrelevant in a booming state. No more.

This isn't a call for bigger government. It is a reminder that in successful places, government does certain things very well, including seeding research, providing superior education, building infrastructure and ensuring the quality-of-life elements that attract talented people.

These governments also are outwardly focused, including effective economic-development efforts to bring in foreign investment and increase exports. They also work to ease government burdens on the private sector.

These places won't be insulated from every hard time — witness the recent difficulties of Ireland — but their policies make it more likely they will bounce back sooner and leap ahead again.

States can't do it alone. Obviously the Great Disruption will be a calamity so severe that major federal help will be needed for states and cities from the incoming administration of Barack Obama.

One unsettling early sign is the $600 million in cuts facing higher education in the state. Some austerity may be unavoidable. But this looks like a slice into the flesh of a key driver in any advanced economy.

But states in the hunker-down mode ignore the competitive calculus at their peril. It's ignoring the future.

Jon Talton: jtalton@seattletimes.com