TW: A large piece (roughly $200 billion) of the Obama stimulus plan is slated as payment to local and state governments to cover short-term budget deficits amidst the recession. Without the federal support the local and state governments, who cannot deficit spend, will be forced to slash spending across the board. Local governments in particular are hurt severely this time since real estate related taxes represent such a large part of their revenue.
Do the Republicans really want to cut local and state spending by $200 billion amidst this recession. There is a reason you may have seen Republican governors coming out far more strongly for the Obama plan over the weekend than their Congressional counterparts who are enjoying the political gamesmanship of "government sucks, lets cut taxes".
The other point to Norris' piece is that deflation grosses up nominal spending figures. We are used to inflation adjustments grossing down nominal figures. Instead of say a nominal number of 105 being reduced down to an inflation adjusted "real" 100 figure, a nominal 95 figure gets grossed up to a deflation adjusted "real" 100. That was a big factor btw in the real GDP number being better than forecast last week.
From Floyd Norris at NYT:
"Last week’s G.D.P. report included one number that seems ominous to me: Spending by state and local governments is plunging.
Few noticed this because it is common to focus on the “real” inflation-adjusted numbers. By that measure, state and local government consumption (as opposed to investment) spending was up 0.1 percent in the fourth quarter.
Evidently, however, the federal government thinks state and local governments are benefiting from a lot of deflation. The “nominal” figure — the estimate of actual dollars spent — fell at an 11 percent annual rate. That is simply unprecedented. The previous low for that figure came in the third quarter of 1952, when it fell 4.5 percent.
It is a hard figure to believe, and I suspect it will be revised upward. But if it is not, it is scary.
To get a feeling for why those governments are in trouble, turn to the S.&P. Case-Shiller house price indexes
...While I was in Davos, Switzerland, a letter arrived at my home from New York City, telling me my house was assessed for less than it was a year ago. It is no wonder the city is talking about layoffs."
http://norris.blogs.nytimes.com/2009/02/02/as-home-prices-go-so-do-cities/
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