“States are going to have to cut back spending and raise taxes the same way Greece and Spain are. That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”
-Dean Baker, co- director of the Center for Economic and Policy Research in Washington.
Interesting discussion at Bloomberg.com about the coming budget crunches in US states and cities:
Even as the U.S. appears to be on the mend — gross domestic product has climbed three straight quarters — finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP . . .
State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged.
State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany.
That is an ugly statistic. And I agree with Gluskin Sheff’s David Rosenberg — massive budget cuts and tax hikes will only make the situation worse, not better. The time to raise taxes and cut spending is during an expansion, not immediately post-contraction.
As I have noted previously, we — governments and individuals — are better off when they spend counter-cyclically . . .
States of Crisis for 46 Governments Facing Greek-Style Deficits
Bloomberg, June 25 2010
Ben Bernanke needs fresh monetary blitz as US recovery falters
Telegraph 9:44PM BST 24 Jun 2010