TW: Have mentioned this before but states do not have the ability to print money and run fiscal deficits like the federal government (if the Confederates had won then they might have but I digress...). When state governments cut their spending they create a pro-cyclical dynamic whereby just when the private sector is contracting the states are contracting concurrently creating a vicious circle. Hence the need for federal stimulus (hello Hooverites!!!). Imagine if the Federal government were similarly constrained, taxes would either be shooting up or spending significantly reduced right into the teeth of a severe demand contraction. A vicious circle would ensue leading without question into GD 2.0.
From David Rosenburg Merrill Lynch economist:
"...The focus and headlines remains exclusively on what the Federal government is doing to boost the economy. But few write about what the state and local governments are doing to stay solvent – cutting back on spending at an
unprecedented rate. Indeed, what seems to be forgotten is that after consumer spending, the lower level of government, with a 13% share of GDP, is the most important part of the economy – this is a sector that represents our teachers, law enforcement, fire prevention, and health and social assistance. The state and local government sector employs 20 million, or 15% of the total, compared with 13 million in manufacturing, 8 million in financial services, less than 7 million in construction and fewer than 3 million at the federal level. Fiscal gaps have now opened up in 42 states, and, when added to the shortfalls at the start of the year, they to a whopping $80 this offsets more than 60% of the fiscal tailwind. And in 2010, the amount of fiscal tightening from the states/local governments is expected to total $85 billion which bites into 30% of the stimulus we will see at the federal level..."
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