Paul Krugman is generally credited with coining the term “fifty little Hoovers” to refer to our state governments and the current economic crisis. The macroeconomics textbook says that when a recession hits, the government should implement expansionary policy, whether monetary – making cheap money available – or fiscal – borrowing money and spending it to compensate for falling private-sector demand. However, states have no monetary policy, since they don’t control the money supply, and they generally can’t engage in expansionary fiscal policy, because most have made it prohibitively difficult to borrow money and go into deficit. So in a recession, states tend to cut spending and raise taxes, which only compound the effect of a recession. Since most states’ fiscal years end on June 30, some of the effects of this belt-tightening should be hitting right about now.
One thing that states spend money on, but that people generally don’t think about, is legal services for poor people. I think about this because I am spending the summer working (for free) for a legal services provider in Massachusetts. In Massachusetts, like in many states, funding for legal services for the poor comes mainly from two sources: (a) interest on lawyers’ trust accounts (IOLTA) – that is, the short-term interest paid on money that your lawyer is holding for you for some reason; and (b) direct appropriations in the state budget.
Well, you can see where this is going. The Times had an article earlier this year about the impact of the financial crisis and the collapse in short-term interest rates on IOLTA money, talking about staffing cuts of 20% or more. Since then, things have only gotten worse. In Massachusetts, projected IOLTA funding has falling from $26 million to $10 million, and the direct appropriation was cut from $11 million to $9.5 million (it could have been as low as $8 million); put those numbers together, and you get a 47% cut in funding from our two main sources. (Those aren’t the only sources of funding, so the total impact may be less – or it may be more. I don’t really know much about the administrative side of things.)
We’ve adapted mainly through voluntary attrition and severe cuts in hours for most of the staff, but the real losers all over the country will be people who are turned away at the doors of legal services offices. Legal rights, it turns out, are a little like health care; they can be really important – if, for example, your landlord is trying to evict you, or if some government agency made a mistake in calculating your benefits – but you generally need money to defend them. And in this case, if the state doesn’t provide services to people who can’t afford lawyers, no one will. I’d like to see what the free-market solution is here: maybe someone will suggest having lightly-regulated competition between legal insurance providers.
As an aside, most of my legal services organization is probably now “part-time for economic reasons,” a category that now makes up more than 5% of the work force. That may or may not constitute a drag on the unemployment rate when the economy finally turns around; Calculated Risk thinks not.