Nationwide, the Great Recession is over. Economic output is expanding, modest job growth has begun, and housing prices are stabilizing.

At last thoughts are turning to building a new and more durable “next economy” in the U.S. and its regions.

And yet across the 50 states, a major problem intrudes.

Three years after the crash, the deepest economic downturn in memory has exposed and exacerbated a massive public-sector fiscal crisis that has the power to paralyze states, undercut growth, and turn states inward just when they need to look outward.

To begin with, almost all states are wrestling with large “cyclical” deficits that represent the temporary fallout of the recession and its aftermath (i.e., the sharp decline of taxable economic activity in states). These shorter-term shortfalls are in some places crushing but they will ease as the economy recovers.

But beyond that, the recession has also revealed the existence of longer term, and sometimes gargantuan, “structural” imbalances in states as diverse as California, Arizona, or Illinois.

Frequently the result of excessive tax-cutting or starry-eyed spending in better times, structural deficits reflect the emergence of the chronic shortfalls that result when revenue consistently fails to grow in tandem with expenditures. Yet now such chronic budget gaps — adding up to 10 or 20 percent of general fund expenditures in places like California or Arizona — have reached the crisis level.

And here is the crux: Essentially the end-point of business-as-usual, these massive imbalances are going to compel massive reform, or else they will degrade states’ ability to renew themselves for years. Let us hope policymakers rise to the task.

What is the business-as-usual that created the current mess? Myopia, rigidity, ideological warfare, and fragmented decision making explain most of it, as noted a recent report my team at Brookings Mountain West developed in partnership with the Morrison Institute for Public Policy at Arizona State University.

Look, for example, at the contrasting but related messes in California and Arizona — two of the Western states we studied in our report.

California’s deeply entrenched budget problems show how overly-optimistic spending, combined with voter mandates and institutional constraints (with none of it linked together), can lead to trouble. There, a popular initiative directing half of all new revenue to schools has combined with multiple state and local voter-approved limits on taxing and revenue raising to create a stunning fiscal train wreck. California now faces an astonishing $22 billion total deficit for Fiscal Year (FY) 2011, of which more than half ($12.7 billion) is structural and so is essentially permanent and has little to do with the current downturn.

Arizona’s fiscal problems, meanwhile, demonstrate how a single-minded emphasis on tax-cutting, combined with California-style voter mandates and institutional constraints, can also lead to calamity. Just as starry-eyed as California but in a conservative vein, Arizona basically gave away the store in better times by handing out a series of ill-advised tax cuts (total value, adjusting for inflation and growth: $2.9 billion since 1993) — all unaccompanied by spending cuts. True, major new education and Medicaid expansions in the last decade added to the problem. But for the most part a fiscal disaster resulted from the way the massive tax cuts combined with several voter mandates and a super-majority requirement for any revenue increase. The long-predicted result: The Arizona general fund for FY 2011 is now short some $3.4 billion, or a full 33 percent of the needed total, with fully two-thirds of that amount ($2.1 billion) associated with the state’s permanent structural gap.

The bottom line: Arizona and California got in trouble by combining rash, basically optimistic spending and tax decisions in good times with rigidity and narrowness. In each place the basic need to constantly compare and link spending and revenue-raising broke down thanks to ideology, a loss of consensus, and the recourse to voter mandates, all of which is now feeding on itself. And it’s a problem that is endemic — in Illinois, in New Jersey, in many other states.

What is the way beyond this mess? At the most concrete level, states need to break with business-as-usual in three fundamental ways. First, they will need to take unprecedented steps to close gaps — and the sooner the better (witness Illinois’ large, temporary new income tax increase). Second, states need to improve the quality of their fiscal policymaking by working to broaden, balance, and diversify their revenue bases while looking to the long-haul balance of taxing and spending. And third, these states need to improve the information sharing and budgeting processes through which fiscal problems are identified, analyzed, and addressed.

But to achieve any of this, states must break radically from habits of recent years. They need to reconstruct the budgeting process as a pragmatic give-and-take based on short- and long-term fiscal realities they actually face. That means, in the end, true political collaboration. Plus, they need to make it much more difficult for interest groups and others to pass budget-blowing ballot measures that blow holes in budgets, failing to recognize the overriding need to balance revenues and expenditures.

And, states need to foster collegiality and cooperation instead of the usual sloganeering and ideological warfare.

The return to fiscal health will be slow and painful. But steps can and must be taken now to reform the states’ dysfunctional budget dynamics and put states on a better footing as soon as possible. Absent those indispensable moves, the present inward-turning paralysis in state after state will be prolonged for years and preclude the broader, much needed economic reconstruction of America’s regions and states.

Mark Muro is the co-director of Brookings Mountain West and a senior fellow at the Metropolitan Policy Program at Brookings. He is a co-author of “Structurally Unsound: Cyclical and Structural Deficits in California and the Intermountain West,” a co-production of Brookings Mountain West and the Morrison Institute for Public Policy at Arizona State University.

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The federal transportation finance system is broken and will be short on cash for the for a long time.

Some regions—like the growing Phoenix, Salt Lake, Las Vegas, and Denver metropolitan areas—have meanwhile achieved transformation viability through unusual self-help (although they still face massive challenges).

Is there a deal to be done? Perhaps there is.

Check out, for example, the intriguing concept for a new federal-metro partnership in transportation finance being shopped around by the Maricopa Association of Governments (MAG) in Arizona.

Challenged by needs yet pessimistic about the likelihood of new federal funding, MAG would have the federal government and large metropolitan areas work a trade in which Washington would provide new incentives in the form of increased and direct funding to metropolitan planning organizations (MPOs) and new flexibilities in exchange for those regions’ continued contribution of substantial regional funding to the creation of the national transportation system. Along those lines, what MAG calls a “new partnership” between Washington and its most creative regions might enable new progress in addressing the nation’s gargantuan transportation challenges.

In short, MAG is suggesting that the federal government help those who are helping themselves and so help them to address the nation’s pressing infrastructure needs.

At minimum, it’s an idea worth considering at a time when the nation needs to get more investment into the system despite brutal fiscal constraints.

Increasingly, after all, metropolitan areas around the country are acting on their own in the absence of federal leadership in envisioning, designing, and financing a true 21st century transportation system in America.

Most dramatically, as MAG writes in its recent concept paper, large western metropolitan areas are taxing themselves and dedicating substantial local money to what is in effect the nation’s transportation system, effectively contributing to the construction of the nation’s critical infrastructure grid and adding capacity to the national system that allows freight to move from the Western ports and gateways to eastern destinations.

In metropolitan Phoenix, for example, voters in Maricopa County approved Proposition 400 in 2004 which extended a half-cent sales tax for regional transportation for another 20 years. That bit of local effort will generate over $ 11 billion over time to expand regional transit service (including the expansion of the region’s new light rail system). But it will also dedicate billions for freeway upgrades, additional lanes, and improved interchanges, including substantial improvements to the interstates including I-10 and I-17.

In the Las Vegas area, Clark County taxpayers have poured some $1.3 billion into construction of the Bruce Woodbury Beltway, a 53-mile freeway that will be added to the interstate system.

Other major metro areas like Denver, Salt Lake, and Los Angeles have gone to their voters for approval of ballot initiatives to fund a mix of light rail lines, highway projects, commuter rail and corridor preservation. A coalition of business and civic leaders in the Dallas Metroplex, for that matter, is pushing state legislature to give metros in Texas the authority to do the same.

In short, the big metros of the West and Intermountain West—like others across the country—are laboring hard to keep up with system maintenance, enhancement, and expansion needs even along clearly “national” corridors on which they are investing substantial local resources.

Shouldn’t they be rewarded for that? Yes they should.

Which is where MAG’s “new partnership” idea comes in.

Through the “new partnership” MAG would have the federal government reward large metropolitan areas that have secured long-term and substantial regional funding sources approved for a minimum of 20 years and that equal at least 50 percent of the annual federal transportation funding received by the region. As to the incentives, a possible menu of options might include: increased federal funding commensurate with the regional funding; more direct funding to MPOs; more flexible “mode neutral funding;” more streamlined planning processes; more direct reporting to federal agencies; and reduced bureaucracy.

Can it work? Clearly there are many details to work out and vet in the MAG scheme.

Legitimate questions can be raised, for one thing, about whether the “new partnership” would lead to new reliance on sales tax funding sources that are at once regressive and susceptible to volatility.

Moreover, a critical element of any new federal-metro partnership should be enhanced accountability and adherence to national performance goals.

But surely MAG’s creative thinking is a smart attempt to work out a new and cooperative way forward that would reward those metros that are already dedicating scarce local resources to national priorities while enticing more to do the same.

As we keep saying, while federal and state governments need to “lead where they must” with adequate investment and reform on critical priorities, metropolitan leaders should not wait for the federal and state governments to act—and they should be rewarded when they do.

So we say: Let the pilot experiments begin!

Mark Muro is a fellow at the Brookings Institution and the policy director of the Metropolitan Policy Program there. Rob Puentes is a senior fellow there and the director of the program’s Metropolitan Infrastructure Initiative.

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The truism, of course, is that Las Vegas is the great exception–a bizarre, completely unrepresentative aberration thankfully isolated in the middle of the Mojave Desert.

And there is plenty of truth to the perception, crystallized in the fantastical, now mostly frozen construction site of the Strip skyline.

And yet, as my group at the Metropolitan Policy Program at the Brookings Institution launches an initiative to deepen our research in the Mountain West, I find myself thinking less about the ways Las Vegas is strange and more about how it is representative, even emblematic of America’s current predicament.

After all, Las Vegas’ gargantuan problems and its necessary way forward mirror and take to an extreme those of our troubled nation as a whole.

Southern Nevada, for starters, may well stand at ground zero of a national economic crisis made massive by speculation, financial game-playing, and insufficient attention to the fundamentals. No large U.S. metro area has suffered house price declines greater than Las Vegas’ 24 percent slump in the last year. No large metro has a higher concentration of home foreclosures. Gross metropolitan product has declined by 3 percent since its last peak in early 2007. And unemployment now exceeds 13 percent.

In this respect, Vegas exemplifies and exaggerates America’s economic quandary.

Most notably, growing consensus believes the nation needs to export more goods and professional services, and trade less on consumerism. As Larry Summers, the director of the National Economic Council, said recently, “The rebuilt American economy must be more export-oriented and less consumption oriented.”

Yet this is potentially disastrous for Las Vegas–just as it is challenging for the nation–because the Crystal City is massively over-dependent on consumption. Using one group of indicators, for example, we calculate that Las Vegas depends on consumption activities (real estate, construction, eating, drinking, and hospitality) for an astonishing 53 percent of its private-sector metropolitan GDP.

Only southern Nevada is not alone in its dependency: Orlando relies on consumption for 46 percent of its output, San Diego for 38 percent, Phoenix 34 percent, and so on, with the metropolitan average running to about 27 percent.

That hints how Las Vegas represents only a heightened case of the nation’s broader vulnerability to any long-term increase in the savings rate and consumption pull-back. It also points to the immense challenge the nation faces in returning to a semblance of balance and economic sanity, including through goods exports.

Or to put it another way, Las Vegas epitomizes to a heightened degree many of the questions facing the whole nation. Where will the next period of growth come from? How can we build a more sustainable new economic order? How will we use the bad times to change and get better?

As to the answers to those questions, the potential outlines are slowly coming into view, but they will be hard to fill in, whether nationally or in Las Vegas.

Much is fluid, but it seems pretty clear now that the next economy must require reforms and new investments in infrastructure, innovation (especially in energy), education, and sustainability. Nationally, a major new partnership between Washington and U.S. metros is necessary to make the most of America’s place in it.

And here again, Las Vegas offers a relevant instance. Too little work aimed at science, technology, and energy innovation is going on. The region contend with seriously low education levels and major water sustainability and development challenges. And its potential as a convening hub for major conferences and professional services development is undermined by its woefully deficient highway, rail ands transmission grids to move people in and out efficiently.

Yet for all that, the region is groping its way forward, motivated by a degree of fear.

Key leaders are pushing hard for a high speed rail link to Los Angeles and talking up a true interstate link to Phoenix.

Talk continues about ways to move the region’s convention and visitors economy up the value chain to make the place a true center of higher-value convening and deal-making, with a focus on renewable energy deployment.

And beyond that, few metros have made more striking efforts to go green. Per capita water consumption is plunging. The huge CityCenter project on the Strip will open soon as the world’s largest green development project. And no state has shifted faster and farther toward renewable energy than Nevada.

In short, bizarre, heedless, and extreme Las Vegas is not solely deviant but also paradigmatic. Like the rest of America, it went too far, and broke down, and now faces the challenge of the “reset” with the beginnings of a new approach. But it had better use these bad times well.

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How should a nation stimulate the economy when there’s no single U.S. economy, nor even 50 state economies, but instead a loosely linked network of 363 metropolitan economies, each composed of multiple, independent-minded towns and counties?

Well, for one thing it should invest in what matters to metros, and beyond that, it should provide to regions significant power and incentives to “put it all together” in a coherent way.

That’s the way to make the most of a stimulus push.

Which raises the $700 billion question: How did Congress and the Obama administration do this winter with the now-famous American Recovery and Reinvestment Act (ARRA), at $787 billion the biggest and boldest response to a national economic downturn in U.S. history?

The answer, based on an initial review of ARRA by our team at the Metropolitan Policy Program at the Brookings Institution, is a definite “fair to middling.” Sort through it carefully, and the legislation looks very much like a mixed bag of “business-as-usual–though punctuated with surprising new opportunities.”

ARRA was cobbled together hastily to address an economic emergency. Thus, the need to intervene quickly led the package’s designers to channel ARRA’s huge flow of funds largely through existing federal-state-local mechanisms, subject to existing laws and guidelines. Because current federal policy is generally neutral or hostile towards action at a metropolitan scale, ARRA is also.

And as a result, ARRA inhibits metropolitan creativity in implementation in three ways. First, it assigns a dominant role to states–which have an uneven record on metropolitan issues. Second, the package treats most of its investment streams as separate and distinct, and sends them to multiple actors at different levels of state-regional-local authority, which will complicate efforts at the metropolitan level to “put it all together” in service of integrated solutions. And third, ARRA’s welcome emphasis on transparency tilts too much toward curbing waste, fraud, and abuse–and too little on establishing a clear, sensible focus on measuring outcomes.

The result is a package that on balance represents more-of-the-same in the flawed run of federal policymaking.

And yet, despite its flaws, ARRA must be counted a boon to U.S. metro areas: It delivers billions of dollars of resources to state and local problem-solvers and affords some important opportunities to those leaders to make the most of it by coordinating its scattered flows.

On the resources side, we found that ARRA directs a whopping $335 billion–43 percent–of the total stimulus appropriation towards significant investments in the four key drivers of national and local prosperity that Brookings’ Blueprint for American Prosperity initiative notes are concentrate in metropolitan areas.

Regional leaders can in fact be delighted that, on balance, the stimulus package invests heavily in what matters: investments in federal R&D on clean energy; school reform and workforce training; transit and high-speed rail; affordable housing, neighborhood stabilization, and energy efficiency.

Such infusions at a time of plummeting growth represent an important boost.

Beyond that, ARRA holds out significant opportunities for creative metro leaders to engage in coordinated, regionalized problem solving that links and aligns the nation’s key assets in the places where they are concentrated–metropolitan areas.

A prime example: it includes $750 million for connecting workforce development to competitive industry sectors that could spur regional approaches to building high-value industry clusters, especially around energy efficiency and renewable energy.

Likewise, some $1.5 billion will fund competitive grants to support nationally, regionally, or metro-significant projects that may facilitate linking transportation, housing, energy, and environmental concerns.

And for that matter, ARRA provides $3.2 billion in tremendously flexible Energy Efficiency and Conservation Black Grants that look certain to catalyze scores of metro-scale strategies for reducing fossil fuel emissions and promoting energy efficiency in transportation, building, and other sectors.

In short, ARRA provides many important new resources to state, local, and metro leaders’ efforts to assemble the key drivers of regional prosperity; with good fortune that should spark some genuine efforts to foster high-quality governance and integrated implementation. But it makes only modest advance in recasting how the new federal assistance might best be bundled and aligned to serve the nation’s and metropolitan areas’ long-term recovery. Deeper reform remains a critical agenda for the future.

Creative players at the local, metro, and state levels should move aggressively to do what they can to link and align the stimulus package’s disparate programs to maximize their benefit–at home, and for the good of the nation.

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President Obama’s economic recovery package will succeed to the extent it juices the true engines of the American economy–U.S. metropolitan areas, home to two-thirds of our population, generators of three-quarters of our GDP.

That much is clear.

But now that Obama has traveled to Denver to sign the bill, doubts are in full flow about whether the needed juicing will actually occur.

Overwhelmingly, the smart set predicts the bill’s haphazard collection of separate funding items–for roads and transit, schools, safety net programs, and energy efficiency–will be frittered away in an uncoordinated spending spree. The prevailing “wisdom” is that state and local implementation of the $787 billion package will degenerate into a scrimmage of competing agendas among governors and legislatures, state capitals and city halls, and even between neighboring municipalities.

But: Isn’t there at least a chance the massive, disconnected funding flows of the stimulus will trigger coordinated responses in U.S. metropolitan areas?

It’s easy to be skeptical. Clearly, few of those who drafted the stimulus agreed with the case we made in our our Brookings “MetroPolicy” report–that coordinated regional decisionmaking is the straightest route to regional and national job growth. Stuck in an older mindset, Congress for the most part rejected calls that it give direct funding to metro-area actors. Instead it funneled large tranches of money to the states, whose record on knitting together infrastructure, housing, and economic development programs to maximize the productivity and sustainability of metro regions is mixed at best.

And yet, here’s my thought: For all of the business-as-usual on display in Washington, there have been significant signs in recent weeks that metropolitan areas themselves (and to an extent states) are ready and able to impose some order on the mess of federal policy and new dollar flows. I’ve been impressed at the energy and focus with which state and local leaders are preparing to try to aggregate and align the recovery package’s myriad separate funding streams–for highways and mass transit, school repairs, housing programs, revitalization of distressed areas, for energy retrofits, often with a strong metropolitan focus.

Coordination and quarterbacking are coming together all over.

At the state-level, as many as 15 governors, according to Stateline.org, have already created new positions or working groups to manage how their states spend stimulus funds. Alabama, Ohio, Massachusetts, Minnesota, New York, and Vermont have all appointed infrastructure or stimulus coordinators or “czars” to organize and oversee stimulus-funded projects across state government. The governors of Florida, Kansas, Missouri, and Wisconsin have all set up new advisory groups or task forces to get different state leaders all on the same page when it comes handling their recovery packages.

Even more important, significant work has been underway for weeks at the metropolitan level to try to craft a unified strategy for integrating the new federal funding in support of maximum metropolitan–and therefore national–benefit.

The Mid-America Regional Council (MARC) in the Kansas City area, the Puget Sound Regional Council, and the Regional Transportation Commission of Southern Nevada are among those that have all assembled regional lists of transportation and other public works projects to help metro leaders make the most of the moment and advocate with a unified strategy for their regions’ needs in their state capitols. Similarly, Forward Metro St. Louis, a regional advocacy coalition, is serving to mount a bi-state metropolitan voice in Missouri and Illinois to ensure that federal stimulus funds maximize regional economic gains.

And metropolitan actors are asserting themselves with even more focus in a range of other metropolitan areas.

In Chicagoland, the Chicago Metropolitan Agency for Planning is preparing aggressively to shape implementation of the stimulus package and has posted draft criteria to help prioritize project selection across the region. So too in the Bay Area, where the Metropolitan Transportation Commission has developed regional implementation priorities to ensure the region makes the best use of the by prioritizing both “system preservation” and “game-changing” investments that can help transform the economy. Metro Denver’s Regional Council of Governments is also encouraging agreement across area stakeholders to have stimulus funds support transportation projects that are part of regional systems.

OK, you’ve heard the litany–that stimulus flows will be too disconnected, frittered away. But what if the prevailing wisdom is wrong? What if 20 years of emerging metropolitan consciousness and capacity in Sacramento and Denver and Kansas City and Chicago and Charlotte mean that the package evokes surprising successes on the part of savvy region-minded leaders? What if they’re able to pull this sprawling shower of separate funding flows together into into cohesive recovery and infrastructure packages that truly lift the metropolitan hubs?

If that happens, then we will know, once and for all, that the truest home of fresh, reformist thinking lies not in Washington, and not in state capitals, but in America’s metropolitan areas. And our nationwide economy will be a big winner.

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