What follows is a piece written by John Lozowski, a Long Island-based economic analyst who has his BA in Economics from Stony Brook University, and his MBA from St. John’s University.  John was asked to give his insights on the impact national fiscal policy has on Long Island. You can follow John on Twitter @Jlozowsk (https://twitter.com/jlozowsk)

Policymakers at the national level have completely abdicated their responsibility to promote economic growth and full-employment for the nation as a whole.  With Congress hopelessly deadlocked in its ability to produce any pro-growth legislation, the hope seems to be that lawmakers simply do no harm by somehow managing to avoid the “fiscal cliff” – a large pro-cyclical fiscal adjustment composed of automatic spending cuts and tax hikes – approaching at year end.  At the same time the Federal Reserve, led by Chairman Ben Bernanke, has also decided to take an unhelpful “wait and see” approach even though by its own standards, the Fed is missing the mark on both full-employment and price stability – its so-called dual mandate.
What this shirking of responsibility leaves us with is an economy recovering all too slowly to give anyone the feeling of optimism about the future.  Economists generally consider job growth of approximately 100,000 jobs per month necessary just to keep up with growth in the size of the labor force.  Currently, the consensus among professional forecasters is that the country will add somewhere in the vicinity of 150,000 jobs per month into the foreseeable future.  While it could be worse, at this pace the United States will only return to full-employment (currently defined by the Fed as an unemployment rate of 5.2-6.0%) at some point in 2015 or 2016, and that’s if no additional headwinds from Europe or slowing growth in the developing world hit the US economy.
What economists have known to some degree or another since the early part of the 20th century is that the business cycle is caused by fluctuations in what John Maynard Keynes termed “aggregate demand” – simply the total amount of spending in the economy.  Milton Friedman brought to light that fluctuations in aggregate demand can largely be controlled and offset by the monetary policy actions of the Federal Reserve, and he famously blamed that same organization for allowing the Great Depression to become so great.
Today, many economists blame our current anemic recovery on inaction on the part of the Bernanke Fed.  While it seems to many people like the Federal Reserve has gone to extraordinary lengths to try to stimulate the economy, and perhaps failed, theory still tells us that it is monetary policy that absolutely controls the path of total spending in the economy.  By capping its willingness to tolerate inflation at 2%, the Fed is in fact inhibiting the economy’s ability to recover.  Take for example the problem of the unemployed.  The Long Island Association’s Monthly Economic Report for August 2012 states that “three years into the economic recovery, the U.S. still employs almost five million fewer people than when the recession started.[i] Taking five million people out of work means taking five million people out of daily commutes.  Think what must happen, as a matter of supply and demand, to gasoline prices when you put those five million people back on the road driving to work every day.  Think also of what will happen when you give those five million people the purchasing power to go to the movies more often, or eat out at a restaurant an extra night each week instead of eating at home, or using their new found income to buy new clothes or new appliances and electronics.  With a tightening labor market and an improving economy must come increasing prices.  If the Federal Reserve is dead-set at not allowing inflation to rise above 2.0%, as it has stated it is, then we have exactly the recovery that policymakers want us to have.
This introduces an interesting problem for policymakers at the local level: with a set and dangerously low amount of aggregate economic growth up for grabs, economic development at the local level necessarily becomes a zero-sum game.  One region’s above-average growth must be offset by another region’s below-average growth.  This dynamic makes policy making at the local level much more important than it otherwise would be with a rapidly growing national economy in which all regions and localities share in robust growth.  
A place like Long Island must now try to make their geographic area as nationally competitive as possible and there are a limited number of things it can do to try and achieve that competitiveness.  One thing policymakers might try could be to lower taxes in order to encourage businesses and individuals to locate here.  This is a risky proposition however, with the budget troubles Nassau and Suffolk Counties have been experiencing lately.  At the state level, most states have to contend with requirements that they balance their budgets by law, and risk damaging downgrades of their creditworthiness if they accumulate too much debt.
Alternatively, Long Island can try to tackle the competitiveness problem by focusing on a far larger cost of living here than state and local taxes: housing costs.  In a recently published “Housing Opportunity Index” calculated by the National Association of Home Builders and Wells Fargo, Long Island falls squarely in the bottom fifth of affordable places to live in the nation coming in 197th out of 226 national metropolitan areas studied[ii].
How is this an opportunity for Long Island?  By implementing policies and reforming land-use regulation to encourage affordable housing development in the area, Long Island can begin to attract people and businesses from the rest of the country, and with population growth comes economic growth.  As Paul Krugman noted in a New York Times op-ed on August 14th, 2011 writing about the so-called “Texas Miracle”, Texas has been benefiting from above-average population growth since roughly 1990[iii].  
What accounts for this?  Well, one of the primary factors is the low cost of living from the kind of wide-spread housing development that arises when you remove supply constraints.  Peter Ganong and Daniel Shoag of Harvard University show in a 2012 paper that “tighter regulations impede population flows to rich areas…[iv]” Why does this occur?  Simply because high housing prices reduce the economic returns that are expected from living in rich areas.  Not only will an inflow of people help economic growth and thereby the local labor market, it will also increase the size of the tax base and so help to alleviate some of Long Island’s more persistent fiscal problems.
Housing policy is the low-hanging fruit that Long Island policymakers can pick in order to encourage economic growth.  If policymakers at the national level refuse to get their act together and generate a more significant macro-recovery, states and localities will be forced to fight over the low growth environment we’re left with.  While I would recommend a re-thinking of housing and land-use policy even during good economic times, boosting Long Island’s competitiveness is especially important during these tough economic times.

[i]Kamer, Pearl M.  “LIA Monthly Economic Report, August 2012” Long Island Association, August 2012
[ii] http://www.nahb.org/reference_list.aspx?sectionID=132
[iii] http://www.nytimes.com/2011/08/15/opinion/the-texas-unmiracle.html
[iv]Gangong, Peter; Shoag, Daniel. “Why Had Regional Convergence in the U.S. Stopped?” Harvard Kennedy School, June 2012