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November 21st, 2008
What then must we do?

On Wall Street

The Dow Jones industrial average closed below 8,000 for the first time since early 2003 following news of both a possible deflation in the already stressed U.S. economy and that the Federal Reserve anticipates the current recession to last – at least – through mid-2009.

The deflation in prices has already begun as the Consumer Price Index, according to the Labor Department, fell by 1 percent in October. In the 61-year history of the index, it was the largest 1-month decrease.

Yet as Americans start to pay less and less for groceries, entertainment and other goods and services, it does not necessarily mean consumer spending will increase.

And even though gas has dropped nearly in half since July – to $2.18 a gallon nationally – it is more likely that consumers will continue to spend conservatively in order to either rebuild their savings or pay down their debt – not unlike Americans’ reaction to the federal rebate in the spring earlier this year.

Seemingly, American consumers will not spend America out of this rescission – especially as unemployment is at 6.5 percent and jobless claims are at a 16 year high. According to the Federal Reserve, unemployment rates will only increase.


At the same time, state budget deficits are in the billions in many states throughout the country.  And with Americans spending less, as a bulk of tax revenues are derived from taxes on sales and gas, for example, in addition to various other user fees, eliminating – even reducing – state budget shortfalls will force legislators in each state one of two ways: raise taxes or cut services (or, the ever popular third way, bond or borrow money that the state does not have).

Generally, education funding is the only public service to not endure drastic cuts when a state is in deficit. As a result, what is more likely to undergo cutbacks, among other social services, is infrastructure.

Already, despite calls from President-elect Barack Obama to spend on infrastructure to boost the economy, states are cutting back. Obama’s proposal of a re-Newed Deal programincreased government spending on infrastructure and green energy projects to both update the aging country while putting people back to work – may sound good rhetorically, but it certainly does not take into account not only the federal budget deficit but also each state deficit. If states do not have the means to get projects underway, as it is individual states that put up the primary financing for infrastructure projects, then federal dollars will never be dispersed as there will be no state funds to match.

In Massachusetts, a gas-tax increase is being debated. The current 23.5-cent gas tax has not been raised since 1991, other than a special 2.5-cent underground storage fee. There is a drastic need to increase infrastructure funding in the state, but most voters are opposed to the increase.

Michigan is also considering changing its gas tax. However, as it would cost drivers $42 a month (up from about $30 a month currently paid in fees and gas taxes), voters may be opposed to any increase – especially in a state already suffering greatly from the economic downturn.

Three major American cities – Philadelphia, Phoenix and Atlanta – are requesting at least $50 billion in federal funds to help pay for infrastructure improvements, pensions and short-term borrowing. They are asking U.S. Treasury Secretary Henry Paulson to release funds from the $700 billion financial bailout authorized by Congress last month. All three cities have announced significant cutbacks in public services.

As former Vice-presidential candidate Sarah Palin returns to her duties as Governor of Alaska, the state’s $30 billion natural-gas pipeline could be delayed as demand for natural gas has diminished since fuel prices have recently dropped. Moreover, the current economic conditions throughout the country and even in Alaska may make further financing of the project difficult (especially as the infrastructure project is anticipated to be the most costly in U.S. history). Additionally, whether or not Alaska’s state budget will be in deficit is greatly determined by the cost of gasoline on the West Coast.

Maryland could be forced to cut an additional $2.5 billion from transportation funding in the next few years, after already slashing $1 billion this year. Declining sales and gas tax revenue have hindered the state’s budget during the economic downturn.

In Tennessee, Governor Phil Bredesen says he would support the issuing of $350 million in bonds to repair or replace about 200 structurally deficient bridges in the state and create jobs for Tennesseans. Gov. Bredesen called the bonding a “one time deal” due to the special circumstances the state faces as a result of declining tax revenues and a budget shortfall.

In Georgia, the eventual cost for the statewide transportation plan over the next 20 years is between $142 billion and $251 billion. About a half of those funds would likely come from existing sources, such as federal highway dollars, the motor fuel tax and the MARTA sales tax. However, that leaves an estimated shortfall of about $100 billion with no existing tax revenue source to draw from. As the state is already $1.8 billion in debt, those funds will be difficult to raise.
The total budget gap in Arizona is $2.6 billion. It was also announced that the state has a $3.5 trillion need in infrastructure improvements.

A 2003 proposal by New York Mayor Michael Bloomberg envisioned 76 new schools throughout the city’s boroughs. However, the economic outlook and higher costs have forced the administration to change its plans. Now, a new proposal calls for 42 new schools at a cost of $11.3 billion.

Oregon is $1.3 billion short in maintaining state highways. Recently, Governor Ted Kulongoski announced a plan to spend $1 billion on new roads, bridges and railways to fix crumbling infrastructure as well as boost Oregon’s struggling economy. Like President-elect Obama’s proposals though, a revenue source to fund such a proposal has not been clearly identified.

Nationwide there are more than 550 transit projects valued at $8 billion that are “ready to go” as soon as funding is made available, according to the American Public Transportation Association. Countless other infrastructure projects remain stalled throughout the country as the funds are simply not available to begin building.

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