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Can the Economy Truly Recover With So Many States in the Red?

state budget protest; via Flickr

Question: We keep hearing phrases such as “when the recession/depression is over,” but none of the analysis (that I’ve read or heard, anyway) addresses the relationship of the current and impending government insolvencies.

Surely our economy can’t recover while California and other major states are facing debt and revenue crises that are as yet unaddressed, let alone solved?

Paul Solman: Yes, there’s a huge issue here. The federal government stimulates; municipal governments DE-stimulate. A number of economists — Jamie Galbraith among them — have advocated federal aid directly to states to cover their deficits so they don’t have to lay off workers, because layoffs obviously feed back negatively into an economy that’s already floundering.

Here’s Ethan Pollack from the Economic Policy Institute, citing data from the Center on Budget and Policy Priorities, which I’ve found to be consistently accurate:

“[I]t looks like ARRA [stimulus spending act] fell short in the first two quarters (completely offset by state cuts from July ’08 to June ’09), but by the third quarter is succeeding on filling the state hole, with a good chunk left over (along with federal automatic stabilizers) to boost the economy.”

So bottom line, federal spending IS, at the moment, making up for local cutbacks. But the problem bears watching, especially to the extent you agree with experts like Jeremy Gold, who think states and cities have made pension promises that will prove impossible to meet in the future.

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