States’ Budget Woes Only A ‘Modest’ Drag, San Francisco Fed Reports Says -

Real Time Economics - WSJ

Financial problems at the state level are unlikely to send the U.S. economy back into recession, a report from the Federal Reserve Bank of San Francisco said Monday.

“State fiscal crises aren’t likely to go away soon and will probably get worse before they get better,” bank economists Jeremy Gerst and Daniel Wilson wrote in the release.

“Painful budgetary choices lie ahead for many states, though the drag on the national economy should be modest,” they wrote.

State and local government finance issues have been on the minds of economists and policy makers for a while now. Unlike the federal government, states are rather limited in their ability to make up for falling tax receipts, given that most are legally required to run balanced budgets. That often forces local leaders to cut back on spending and investment programs just at the time many economists believe they need to keep the stimulative power of those activities ongoing.

The federal government has helped state and local governments deal with this situation by borrowing massive amounts of money and supporting programs that would have otherwise been cut. But the impact of federal stimulus is winding down, and even seemingly politically safe moves like keeping extending unemployment insurance are sputtering out.

So why are the San Francisco Fed forecasters hopeful state and local troubles will not be the undoing of the recovery? For one thing, they assert economic activity on a national level is the ultimate determinant of what happens in the states, so the continued gains in activity should eventually aid governments below the federal level.

There’s also the matter of size. The economists note projected 2010 state budget gaps account for about 1% of GDP, adding “the combined state budget gaps from 2009 through 2012, as calculated by the Center on Budget and Policy Priorities, total less than the estimated cost of the 2009 federal stimulus package.”

Posted via email from Jim Nichols