Many, including me have watched in awe in the past few months as unemployment and underemployment have skyrocketed in our nation’s economy. When the federal government creates expenditures it can go into debt in order to make those payments. State and local governments must have balanced budgets. While the government can spend money they don’t have by borrowing money and printing more money to finance expenditures, state and local governments can only really effectively sell bonds, levy taxes, or reallocate funds. Usually this isn’t a problem. Today, unemployment is sucking the resources of state and local governments as well as local non profits and charities, while concurrently the tax base is shrinking due to stock market losses, property devaluation, and unemployment.

All these factors have created the perfect storm for local and state governments. These governments are pushed up against the proverbial wall and with only few choices are forced to make the hard decisions with much less federal aid than one would expect. We are seeing drastic situations for city governments, where last year we watched in awe as the first city in US History went bankrupt.

The problem with this predicament is that unified action is hard to coordinate. Cities must either drastically cut spending, raise impossibly large amounts of money via bonds, or raise taxes. In times like these, tax increases are hard to sell, and with the tanking economies, local and state bonds which have less reliable rates of return than federal bonds are not likely to be something that cash strapped investors have must interest in.

Here is what is happening:

For the first time since the 1980s, state and local government payrolls are shrinking simultaneously, according to US Labor Department data…The last downturn in state noneducational employment, between its peak in 2001 and bottom in 2004, brought a 2.6 percent cut to state payrolls. This downturn will probably be larger, says Donald Boyd, a senior fellow at the Nelson A. Rockefeller Institute of Government in Albany, N.Y.

This is a scary statistic, when local and state governments are being more and more depended on to provide truly indispensable services to their citizens. Since 1980 alone local government staffing has grown by 40%. As well, At least 19 states have enacted mandatory furloughs or are trying to, according to the National Conference of State Legislatures.

Paul Krugman and other economists are wary of state and local government spending cutbacks that might eat into the federal stimulus, effectively cutting into the effectiveness of those dollars that are allocated at the local level.

Why worry about this now? Well, alarming statistics are popping up all over the country. DC Public Schools had to cut almost 400 employees this past month. Early this past year, UCLA forecasters predicted that the State of California would have to cut as many as 60,000 jobs, however the number has been modified due to Governor Schwarzenegger’s massive furlough requests.

In order to be able to provide the vital services that the American public has been dependent on and come to expect, then states need more flexibility in dealing with financial crises. Maybe opening up new crisis only channels that would allow states to borrow via the federal government to stabilize social service programs and be able to pay out unemployment benefits that currently they are having a hard time keeping up with. It is a problem that is currently slowing down the economic recovery that our nation is in dire need of.

Its not that the Federal government totally forgot the state, but rather has refused to arm them with the proper weapons to fight the recession. If we have learned anything from the Hoover parable that Krugman offers, we would do well to empower the state governments to keep up their current levels of spending, not because it would be nice, but because it is necessary.

Tags: state budget, stimulus

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