As Paul Krugman says, there's a clear and viable alternative to the Bowles-Simpson Very Serious Person theater deficit-reduction plan. Not that I expect this to become law, because the easy money on Capitol Hill and K Street is now made by catering to the rich, but having an alternative makes it easier to fight off the worst ideas such as raising the minimum age for Social Security to the point where it cheats working-class adults of significant retirement time.
But as many have pointed out, focusing all of fiscal policy attention on Washington ignores both the spending and the services that are at the state and local level. ARRA and other stopgap support for state and local governments in the past 18 months have had the goal primarily of preventing state and local governments from being too procyclical (that is, cutting programs and firing public employees at a time that would be best for general Schadenfreude and worst for the economy and people in deep need). We have 50 state governments that have various degrees of fiscal health–none too healthy this year, but in varying straits–and it doesn't help the situation that two of the largest states are either governance basket cases (California) or hitting a financial crisis with a governor of questionable judgment (Texas, though many would argue that has also been the case with California).
Because most states are not allowed legally to run operating deficits, the only ways to strike against the procyclical nature of state budgeting are to carve out exceptions from operating budgets or engage in some time-shifting of revenue collection. The generally acceptable exception to an operating budget is creating a separate capital budget, which is restrained by the bond rating of a state and also allows time-shifting of revenue collection by binding a revenue stream to a bond. An acceptable form of time-shifting would be the creation of a much larger rainy-day fund than most states generate. There's a political dynamic common with rainy-day funds–state constitutions require a fund that's generally matched to minor economic bumps, not major ones, but a large rainy-day fund generates political demands for tax cuts, rebates, and so forth. The only way to counter that pressure would be a constitutional obligation to build a rainy-day fund that's matched to economic circumstances. Recession? Operate as you can. Low unemployment? Constitutional obligation to build the rainy-day fund.
Yes, yes, I know that all conservatives are now quoting with glee (or thinking about quoting with vigor) Rahm Emmanuel's statement two years ago that a crisis is a terrible thing to waste. But the reality is that program elimination is best done when people cut loose can find other jobs–otherwise, you're just contributing to the existing mess. With the end of federal fiscal stimulus, that's going to happen in 2011-12 in many states or in the second half of the current fiscal year. But we can plan ahead, or we should stop pretending to be the smartest species on the planet.