When the States Cut Spending

A month ago, I told you the rebate was the wrong kind of stimulus plan, that the best thing to would to be to give the money to state and local governments. Why? Because the states and municipalities will have to cut spending as property and sales tax revenues plumet. And now, when it’s too late (cuz we already gave out lotsa money), Wall Street wants to adopt the Mad Biologist’s stimulus plan:

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles….
The $90 billion swing — from more spending to less — could be enough to push down a weak economy to zero growth or less, because state and city spending has accounted for as much as half of total economic growth since last fall. (A robust economy has a growth rate of 3 percent to 4 percent, compared with the 0.9 percent or less of the last two quarters.) The $90 billion would certainly offset most of the $107 billion stimulus package now going out from the federal government to millions of Americans in the form of tax rebate checks. The hope is they will spend this windfall on consumption and in doing so sustain the economy. That might happen — for a while. But with the cutbacks in state and city outlays canceling out the consumption, the next president, struggling to revive a weak economy, will almost certainly have to consider a second stimulus package.
….The answer, even on Wall Street, is often: subsidize the states and cities.

No one listens to the Mad Biologist. Sigh.

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4 Responses to When the States Cut Spending

  1. KevinC says:

    Or John Maynard Keynes.

  2. Mark P says:

    I had some issues with the idea, but it’s a nonstarter. There is no way that politicians will give billions to other government entities. The potential voter backlash would not be pretty. Of course people might think otherwise then the water department takes an extra week to fix the leak that shut off their water because the pipes needed to be replaced but weren’t and the city laid off half the water department.

  3. I live in Mounds View, Minnesota, and the effect has definitely been felt here. The city council had to maintain current services despite the loss of $1 million in Local Government Aid (which is how possible McCain wunderkind Tim Pawlenty managed to balance the budget without balancing the budget raising taxes. When cities and counties tried to explain to Pawlenty that their costs were fixed and they had no room to cut, he called them whiners.
    Our streets and our infrastructure are in terrible shape, and in order to comply with needed repairs to comply with watershed and environmental laws (as well as satisfy resident demands for better streets) the city council had to adopt a plan of special assessments spread over a period of 15 years in order to get funding to repair the streets.
    Taxes and repair are a pushme-pullyu problem. If residents want the work done, and if we want services we have to pay for them. The money saved in state and federal taxes is more than offset by the higher cost of repaying local. And in the meantime, our county hospitals are overwhelmed by people with no health insurance.

  4. Blaidd Drwg says:

    It looks like the age-old principle of TAANSTAFL is making a comeback, and about damn time…

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