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Senate GOP Blocks Help for States' Jobs, Budget Crises

October 21, 2011

During the debate over the American Recovery and Reinvestment Act (ARRA) in early 2009, stimulus opponent Senate Republican Minority Leader Mitch McConnell proposed, "If the money were lent rather than just granted, states would, I think, spend it wisely and the states that didn't need it at all wouldn't take any." Now would be a good time to take him up on his offer.
After all, on Thursday McConnell's Senate Republicans blocked President Obama's $35 billion bill to keep 280,000 teachers, policemen and firefighters in their jobs. As it is, state and local governments were forecast to lose 110,000 more jobs in the third quarter after having already shed 572,000 employees over the past three years. With disappointing tax revenues only now beginning to approach pre-recession levels and federal stimulus funds evaporating, 42 states face budget shortfalls topping a combined $130 billion over the next three years.
Thanks to McConnell and his roadblock Republicans, state and local governments will continue to be the anti-stimulus.

With the total federal tax burden at its lowest level in 60 years after a decade of plummeting rates for the wealthy, Mitch McConnell nevertheless rejected the half-percent surcharge on millionaires beginning in 2013 that would have funded the Democrats' state aid package. Regurgitating long-ago debunked Republican talking points about the mythical impact of modest tax increases on small business owners and so-called "job creators," McConnell decried the "bailout" from Washington:

"This is a proposal to raise taxes on 300,000 business owners in order to send money down to states so they don't have to lay off state employees," McConnell said at a press conference Thursday.
"We earlier had an experience with this in the first stimulus, which was borrowing money that would have to be paid back by future generations, in order to send [funds] down to states to help them with their financial problems so they wouldn't have to lay off state employees."

For his part, President Obama called the GOP's stonewalling "unacceptable." And with good reason. The measure is not only wildly popular, but is a proven path to keeping hundreds of thousands of Americans gainfully employed.
Ideally, as Matthew Yglesias, Jared Bernstein and others have explained, the U.S. would already have in place a raft of counter-cyclical programs and "automatic stabilizers" to cover the rising demand for jobless benefits, health care and private-sector job retention programs during economic downturns. (That is one of the lessons from countries like Sweden and Germany, which weathered the global recession better than their Anglo-American counterparts.)
But in the American reality, those automatic stabilizers for cash-strapped state and local governments don't exist. And the $164 billion in federal Medicaid assistance and other state stabilization funds from the American Recovery and Reinvestment Act are now drying up.

Which is why the $35 billion state jobs component of President Obama's $447 billion recovery program is so vital.
As the Congressional Budget Office (CBO) and Moody's economist and former John McCain adviser Mark Zandi each documented last year, aid to state and local government provides among the biggest "bangs for the buck" of any federal stimulus spending. While the CBO estimated "transfer payments to state and local governments" provides a multiplier as high as 1.8 (that is, delivers $1.80 in economic returns for each dollar spent), Zandi's model showed a 1.41 multiplier. As he put it in July 2010:

Federal aid to strapped state and local governments also is providing significant economic benefits, lessening their need to slash programs and jobs or to hike taxes and fees.

Forty-nine of 50 states are required by law to balance their budgets. Mercifully, to fight wars and economic calamities like the Bush recession, the federal government is not. And as the National Conference of State Legislatures showed in a recent report, the state budget crisis isn't over yet:

The Washington Post, the New York Times, Reuters, Bloomberg and the Wall Street Journal among others began ringing the alarm bell late last year, warning that state and local governments were fiscal facing a fiscal triple-whammy. Even with spending now well below 2008 levels, the downturn-induced drop in revenues and increased demand for social services coupled with the looming end of the American Recovery and Reinvestment Act (ARRA) is producing yawning gaps in state budgets. And the states, all but one of which must balance its budget each year, are responding with sharp spending cuts, massive layoffs, deferred payments to state employee pension funds and, in some cases, tax hikes.
The numbers are staggering. By November, the Economic Policy Institute estimated that state and local governments had shed 407,000 jobs since their August 2008 peak. With state budget shortfalls estimated to approach $100 billion for each of the next two years, analysts including Moody's Economics and the Center on Budget and Policy Priorities began warning last year future state and local job losses could reach between 400,000 and 900,000. As CBPP put it in June:

The roughly $97 billion shortfall that states are facing for fiscal year 2012, after taking federal assistance into account, equals about 0.65 percent of GDP. Assuming that economic activity declines by one dollar for every dollar that states cut spending or raise taxes, and based on a rule of thumb that a one percentage point loss of GDP costs the economy 1 million jobs, state shortfalls could cost the economy 650,000 public- and private-sector jobs next year relative to the jobs that otherwise would be created.

Writing in the New York Times in July, David Leonhardt put the real cost of austerity at a million jobs:

In round numbers, state and local governments have cut about a half million jobs over the last two years. If they had continued to hire at their previous pace -- expanding as the population expanded -- they would have added about a half million jobs.

And as ThinkProgress documented, "steep spending cuts are hampering economic recovery in some states, while other states that resisted cuts or increased spending are now seeing declining unemployment rates, faster private-sector job creation, and stronger economic growth."
Steep state spending cuts have gone hand-in-hand with rising unemployment rates, falling private-sector payroll employment, and lower growth in state's gross domestic product, or GDP.

Even with tax revenue finally starting to rebound, for the states the future looks bleaker still:

Economists predict they will slash their budgets by up to 2.5 percent this year - potentially the sharpest reduction since 1943. The deepest cuts are expected to occur in the first six months of this year... Most economists think the cutbacks this year will exert an even bigger economic drag than last year.

It doesn't have to be that way. But thanks to Mitch McConnell and his band of record-setting Republican obstructionists, the twin jobs and budget crises gripping state and local governments will only continue to deepen. Or as House Speaker John Boehner responded to potential job cuts for federal workers earlier this year, "So be it."


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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