State, Local Budgets Tanking, Need Help Fast

by James Parks, Nov 20, 2009

With official unemployment at 10.2 percent, creating new jobs is a critical part of any economic recovery. But huge state and local budget shortfalls caused by the nation’s economic crisis will make joblessness worse unless state governments receive massive amounts of aid, according to a new report. 

The report by Ethan Pollack, an Economic Policy Institute (EPI) policy analyst, says the recession has led to much lower tax revenues for state and local governments. Unlike the federal government, state and local governments must balance their budgets by law. So state and local policymakers are cutting spending and raising taxes, steps that will lead to lower consumer demand and more unemployment.

At an EPI forum yesterday to release the report, Trenton [N.J.] Mayor Douglas Palmer said mayors and governors could use additional federal stimulus money to create jobs now, improve the nation’s infrastructure and help small businesses—all of which would have lasting economic and environmental benefits.

Metropolitan economies now account for 86 percent of national employment, 90 percent of workers’ income and 90 percent of our gross domestic product, Pollack said. Mayors lead these metro economies that drive the nation, Palmer said. To reverse the current economic situation and create jobs, the only way to do so is to invest in these metro economies.

In the EPI report, Pollack says states face a two-year $357 billion budget shortfall for the fiscal years 2010 and 2011, while local governments face an additional $80 billion deficit. The American Recovery and Reinvestment Act provided much-needed relief, but its $106 billion in aid to states fills only about 25 percent of the shortfall. The rest of the budget must be balanced by spending cuts and tax increases. Click here to read the report, “Dire States: State and Local Budget Relief Needed to Prevent Job Losses and Ensure a Robust Recovery.”

State and local spending cuts can be particularly harmful to the economy, Palmer and Pollack said. Not only do they deprive citizens of needed public services like health care, transportation, education and safety, they also fall disproportionately on the backs of those with low incomes. Businesses’ sales fall, forcing firms to slash wages or lay off workers, and these workers then cut their own consumer spending. As a result, each dollar of spending reduction by state and local governments leads to $1.41 in lost economic activity.

Without additional state and local budget relief, current and future shortfalls will cause millions of job losses and likely contribute to a drawn-out and painful recovery.

Pollack put it this way:

At this point, Congress has a choice. On the one hand, it can do nothing, thereby forcing states and local governments to cut budgets and raise taxes by hundreds of billions of dollars over the next few years. The result will be a drag on the economy that will at best lead to a long, painful, and relatively jobless recovery and at worst cause enough damage that the economy reverses course and begins to contract again.

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