Commentary | Economic Growth

States in stress

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State and local governments are turning to desperate measures to fill massive budget shortfalls. The University of California’s Board of Regents has voted to raise undergraduate tuition by 32%. Arizona has considered selling its capitol building. The mayor of Pittsburgh, Pennsylvania is proposing a tax on college tuition. And many school districts around the country have floated the idea of squeezing more lessons into fewer days to save on power bills.

All of this, at a time that many economists say the Great Recession is over.

On November 20, EPI hosted a panel of economists along with the mayor of Trenton, New Jersey, who outlined the severe budget shortfalls state and local governments were facing that could require them to make further job cuts. “The mission is not yet accomplished on Main Street,” said Trenton, New Jersey Mayor Douglas Palmer, who delivered the keynote address at the event, Spurring Job Creation: The role of federal aid to state and local governments. Palmer offered a long list of American cities where the jobless rate was well above the nationwide level of 10.2%. Unemployment is 13.4% in Las Vegas, 14.9% in Providence, Rhode Island, and 17% in Trenton.

“I cannot walk down the street to the grocery store, or hold a public meeting, without people – many people – coming up and asking me for a job,” Palmer said. “No one anticipated the depth of this recession and its impact on jobs.”

Mark Zandi, the chief economist for Moodys.com and one of the panelists at the event, said that while stimulus investments made under the Recovery Act had provided a significant source of growth, the economic recovery remained very fragile, especially for state and local governments that were suffering steep declines in tax revenues and faced a total $150 billion fiscal hole in 2011.

“We’re at a point where it’s appropriate for policy makers to provide additional aid,” said Zandi, who said he recommended more federal aid to state and local governments for the fiscal year 2011, which starts next summer.

And panelist Iris Lav, a senior advisor at the Center on Budget and Policy Priorities, said that major budget cuts were looming at the state and local level that could cost the country 900,000 jobs next year alone. To critics who say states should make the difficult decisions to cut spending in order to balance their budgets, she posed some hypothetical questions to illustrate how so many states had already cut to the bone: “Who is willing to have their public school closed? Who is willing to care for that elderly relative?”

Echoing that argument that the almost unprecedented severity of the current downturn called for unusual measures, Zandi said that he would not typically recommend such a level of federal aid. “But this is different,” he said. “The hole is turning out to be larger than we thought and deeper than we thought.”

EPI last month outlined a five-part approach to large-scale job creation that included a recommendation for additional aid to state governments. In the Briefing Paper, Dire States, EPI Policy Analyst Ethan Pollack shows how budget shortfalls at the state and local level will result in additional layoffs and delay a robust recovery unless additional aid is provided.

Speaking at the November 19 event Pollack stressed that such cuts would affect jobs in both the public and private sectors.

“They are going to be laying off teachers, police officers, and fire fighters that they need,” Pollack said during a presentation at the November 19 event. But he stressed that the private sector would be the hardest hit by state and local budget cuts. Many state and local services, such as infrastructure and health care, are actually provided by private employees using public funds, he said. Even when the government provides the services themselves, those public employees still need materials provided by the private sector, like office supplies, police cars, and fire hoses.  And as public and private workers lose income as a result of the budget cuts, they reduce their consumer spending, causing more job losses in the private sector.

“This is not just about supporting government employees,” said Pollack.  “If we do nothing, the entire economy will suffer.”


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