States Forced to Cut Services to the Bone: The Opportunity Cost of the Bank Bailout

Reading about the huge budget cuts almost every state in the country is being forced to make quickly puts the $4.7 trillion we have pumped into the financial sector into perspective, and leaves us pondering: what else we could have done with that money?
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Okay, the bailout of Wall Street isn't going to end up costing us $23.7 trillion dollars, the number that special inspector general Neil Barofsky fired off to call attention to the fact that banks are misusing the trillions we've given them, and are still hiding untold amounts of toxic assets off the books -- aided and abetted by the who-needs-transparency Treasury.

But we have pumped at least $4.7 trillion into the financial sector -- and the pumping isn't over. On Wednesday, Fed chair Ben Bernanke told the Senate Banking Committee that it "may be appropriate" for the government to guarantee the "mountains" of commercial real estate mortgage defaults the banks will likely be facing in the coming months.

At a certain point, these numbers are so huge it becomes hard to keep them in perspective, to be clear what $4,700,000,000,000 means in the real world. But reading about the effects of the massive budget cuts almost every state in the country is being forced to make puts the figure in perspective very fast.

And it reminds us, once again, how lopsided the "recovery" has been: with banks that received billions in taxpayer handouts now reporting massive profits and setting aside record amounts for executive bonuses, and the American people continuing to face 9.5 percent unemployment, 10,000 foreclosures a day, and vital services being cut.

So while Goldman Sachs crows about its $3.44 billion second-quarter profit, and Citigroup and Bank of America strut over the $3 billion and $2.4 billion they respectively earned, we are left to think about the opportunity cost of the trillions we have given to Wall Street -- to ponder what else we could have done with that money.

Consider: at least 39 states have imposed budget cuts that hurt families and reduce vital services to their most vulnerable residents. The litany of those affected includes children, the elderly, the disabled, the sick, the homeless, the mentally ill, as well as college students and faculty, and state government workers.

America's states are facing a projected cumulative budget gap of $166 billion for fiscal 2010. Even more budget gaps are expected for fiscal 2011. Total shortfalls through 2011 are estimated at $350 billion to $370 billion -- and could be even higher if unemployment continues to rise.

These are massive numbers. But when you remember that we spent $180 billion to bail out AIG ($12.9 billion of which went straight to Goldman), you realize that that alone would be more than enough to close the 2010 budget gap in every state in the union. Toss in the $45 billion we gave to now-making-a-profit Bank of America and the $45 billion we gave to now-making-a-profit Citigroup and we are well on the way to ensuring that no state's vital service are cut through 2011.

But instead that money has gone to the banks without any fundamental reform of the system, and without any strings attached about how much they had to turn around and lend to help the real economy recover. Or, indeed, without any strings attached about having to tell us what they did with our money. So all across the country the fiscal ax is falling.

According to a report by the Center on Budget and Policy Priorities, at least 21 states have made cuts to public health programs, 22 states have cut programs for the elderly and disabled, 24 states have cut aid to K-12 education, and 32 states have cut assistance to public colleges and universities.

The devastation is in the details:

In California, around 500,000 children face being denied health coverage due to cuts in a welfare-to-work program.

Minnesota has eliminated a program that provides health care to 29,500 low-income 21 to 64 year olds.

Rhode Island has eliminated health insurance for home-based childcare providers.

Maine has cut funding for homeless shelters.

Maryland has cut funding for a school breakfast program.

In Tennessee, an estimated 30,000 to 40,000 seriously ill people are expected to lose hospitalization and other needed medical services.

In Washington, between 7,000 and 17,000 residents will no longer qualify for a public health care plan for people living just above the poverty line.

Utah has cut Medicaid funding for physical therapy, occupational therapy, and speech and hearing services for adults.

Michigan, Nevada, California and Utah have dropped coverage of dental and/or vision services for Medicaid recipients.

Alabama has canceled services that allow 1,100 seniors to stay in their own homes and avoid being sent to nursing homes.

Georgia has cut back on programs that offer the elderly Alzheimer services, drug assistance, and elder support, and made a $112 million cut in an initiative designed to help close the gap in funding between wealthy and poor school districts.

Arizona has cut cash assistance grants for 38,500 low-income families.

Louisiana has made cuts that could keep mentally ill individuals from receiving the medication they need to manage their conditions.

Nevada will make it harder for low-income families to receive cash assistance and health insurance.

Virginia has decreased payments for people with mental retardation, mental health issues, and problems with substance abuse.

Illinois has cut funding for child welfare and youth services programs.

Connecticut has cut programs that help prevent child abuse and provide legal services for foster children.

Massachusetts has ordered cuts in geriatric mental health services, and prescription drug assistance, and made cuts in Head Start, universal pre-K programs, and services to help get special-needs children ready for school.

Keep in mind, all these services are being cut at a time when more and more people are finding themselves in need of them.

It's a perfect storm of suffering.

Looking at all the money that has gone to the banks -- and how well they seem to be doing, using it to bolster their bottom line (and even buy other banks) -- while the real economy is doing so poorly, proves just how wrong the government's approach to the recovery has been.

This approach was on full display during Bernanke's back-to-back testimony in front of the House on Tuesday and the Senate on Wednesday. He pointed to the bulls charging down Wall Street and the ballooning bottom line of the big banks as evidence that the steps taken by the Treasury and the Fed had helped avert a financial disaster. But he admitted that the prospects for increased employment or a decrease in home foreclosures wasn't likely for the next couple of years. And he admitted that "financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain."

But wasn't that the main reason for the bailout -- to get the banks lending again?

Launching into his questioning of Bernanke, Senate Banking Committee Chairman Chris Dodd said, "Americans who have lost, or are worried about losing, their jobs, their homes, or their retirement security have watched as others reap the benefits of our government's response.... When can [the American taxpayers] expect the recovery that they have funded? When will working families see their rally?"

Instead, they are seeing programs slashed, services cut, and state budgets balanced on their backs.

Something is very wrong with this picture.

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