Legislation recently proposed by Sen. Tom Harkin (D., Iowa) would provide $23 billion in aid to states to keep teachers and other education professionals employed even as state budgets are in crisis. A range of respected macroeconomic forecasters have identified fiscal relief to states as one of the quickest-acting and most-efficient forms of stimulus for an ailing economy. This large bang-for-buck means that the $23 billion gross cost of the Harkin education staffing proposal greatly overstates its actual impact on the federal budget deficit.
Mark Zandi of Moody’s Economy.com estimates that each dollar of federal aid to states provided during times of high unemployment will lead to a $1.40 increase in overall economic activity (gross domestic product, or GDP). The Congressional Budget Office has estimated that each 1% increase in actual GDP relative to potential GDP (for example, the level of economic activity that would have been reached had unemployment been at 5% instead of 10%) leads to a $0.38 reduction in the federal budget deficit.
Using these two numbers, we can roughly calculate the self-financing of the education staffing proposal: the $23 billion multiplied by the 1.4 multiplier yields a $32 billion increase in GDP as a result of the legislation. This extra $32 billion will then generate extra taxes and reduced safety net spending that will lower the federal budget deficit by $12.2 billion. With this offset, the net cost of Harkin’s proposal will be only $10.8 billion, or less than half the headline price.