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State Budget Woes Canceling Out Federal Stimulus

Via Ezra Klein, Bruce Bartlett argues that state budget shortfalls and ensuing cuts to staff and services clearly cancel out the federal stimulus and that “economists will view this as a preventable error equivalent to the Fed’s passive shrinkage of the money supply in the early 1930s.”

He elaborates with a number of data points in his Fiscal Times column:

A June 3 report from the National Governors Association and the National Association of State Budget Officers shows that the states have cut aggregate spending by $74.4 billion, or 10.8 percent, since 2008. The expiration of $55 billion in temporary federal aid to the states could lead to further substantial spending cuts beginning on July 1.

Budget expert Stan Collender warned on June 8 that a sharp cutback in state spending mandated by state balanced budget requirements could have a negative effect on the economy as a whole. [...]

A May 26 report from Pew reviewed the responses of 13 cities to the recession. Virtually all were enacting broad based tax increases as well as new fees, job cuts and reductions in pay and benefits for municipal workers. [...]

A March 5 OECD study examined the cyclical behavior of subnational governments throughout the OECD. It found that such governments in the U.S. behaved in a far more cyclical manner — exacerbating the business cycle rather than moderating it — than in any other major country. A February study by economists Joshua Aizenman and Gurnain Kaur Pasricha found that fiscal contraction in the states offset almost 100 percent of the fiscal stimulus at the federal level in 2009.

These data are as strong an argument as any for the passage of the jobs bill and other more aggressive measures to help boost demand and lower unemployment.

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