As the special session gets underway, the new “Budget Nun” Mac Taylor, and since it’s a he this time I think we’ll go with “Budget Priest”, has released an overview of the Governor’s proposals.  The first thing that pops out is we now have a new shortfall number: $28 billion for the next 20 months, and an unsustainable long-term deficit thereafter.

State Faces $27.8 Billion Shortfall. We concur with the administration’s assessment that the state’s struggling economy signals a major reduction in expected revenues. Combined with rising state expenses, we project that the state will need $27.8 billion in budget solutions over the next 20 months.

Long-Term Outlook Similarly Bleak. The state’s revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013?14 absent corrective action. From 2010?11 through 2013?14, we project annual shortfalls that are consistently in the range of $22 billion, as shown below.

Overall, Taylor is generally supportive of the Administration’s proposals for closing the gap, but I think that has a lot to do with the fact that the Governor is finally using realistic numbers and not employing any borrowing gimmicks.  Compared to the 2008-09 budget, this is extremely welcome.  However, Taylor makes the point that a short-term increase in the sales tax cannot possibly be the backbone of a long-term solution, and three years out we’d still see deficits in the range of $9-11 billion.  Instead, he offers a couple points.  First is one that I’ve been making a lot, that California needs to lobby hard for state and local government relief in the second stimulus package:

In the coming months, there is a good chance that Congress will pass economic stimulus measures in an effort to boost the national economy. In the past, some components of such measures have directly provided state fiscal relief. To date, the administration has not built any estimates of such relief into its budget numbers.  For the time being, this is appropriately cautious to avoid counting on relief that may never come.  The state, however, should continue to press the federal government for economic stimulus measures that will provide California with flexible fiscal relief. While such relief would not solve the state’s budget problem, it could provide several billions of dollars in budgetary solutions.

(While we’re at it, we could also recoup the $2 billion giveaway to Wells Fargo precipitated by the Treasury Department illegally changing the tax code to allow banks to avoid corporate taxes.  Any California Congresscritters want to hop right on that?)

He also rightly notes that the Governor’s tax proposals are regressive in nature, and offers one final solution – fix the VLF that you broke as your first act in Sacramento.

Alternative Program Realignment. As noted above, raising the VLF tax rate to 1 percent has merit from a tax policy perspective. If the Legislature made it the foundation of a program realignment with local governments, programmatic outcomes could be improved as well. Under this approach, $1.6 billion of state criminal justice and mental health programs could be realigned to counties and supported by (1) the revenues raised by the increase in the VLF rate and (2) most of the VLF fee revenues currently retained for administrative purposes by the DMV. By consolidating these program responsibilities at the county level, and giving counties significant program control and an ongoing revenue stream, we think California could achieve greater program outcomes and significant budgetary savings.

You can see the total savings chart at the end of this PDF, but clearly the VLF raise is the big story here.  The LA Times picked it up as a news story and also on their op-ed page today.  For those who counter that the VLF is just as regressive as the sales tax, it doesn’t have to be.

Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It’s true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that’s not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.

You can also build progressivity into the VLF by having it function as a carbon tax, essentially. You could set the VLF at a higher rate for cars that produce greater emissions, and at a lower rate for cars that are cleaner. As California is about to get a waiver to regulate tailpipe emissions under the Clean Air Act in a new Obama Administration, they would certainly be empowered to do so.

This is a repudiation of the very issue Schwarzenegger ran on in 2003.  We’ll see if he’s inclined to own up to his mistake.

I STILL haven’t had a moment to process the still-brewing outcome of Election 2008 here in California, but there’s not much time to savor or despair about the results.  A new session of the Legislature has been called, and Arnold is starting off by calling for a tax increase:

Gov. Arnold Schwarzenegger called today for a temporary 1.5-cent increase in the state sales tax to help close an $11.2 billion deficit in the state budget, as well as new taxes on liquor and oil production.

Schwarzenegger also proposed one-day-a-month unpaid furloughs for state workers for the next 17 months, as well as rescinding two of the workers’ 13 paid holidays.

There are also massive spending cuts planned, $4.5 billion in all, including $2.5 billion on primary school education.  This is all happening because we have a short-term deficit of maybe $10 billion dollars, with an additional $13 billion dollar shortfall estimated for next year.  In all, by the middle of 2010, the projections are that we will be $24 billion in the hole.

This proposal is completely and utterly insufficient to deal with that.  A sales tax increase is regressive and there’s no way around that.  Part of the proposal to extend the sales tax to services like “appliance and furniture repair, vehicle repair, golf fees, veterinarian services, amusement parks and sporting events,” according to the LA Times, and this is part of Karen Bass’ restructuring of the revenue side.  And an oil extraction fee is deeply needed.  We’re the only oil-producing state in the country that does not charge oil companies to take our natural resources.

But the cuts are pretty cruel.  And education isn’t the only thing on the chopping block.  The Governor wants to eliminate dental insurance through MediCal for poor Californians, cut welfare subsidies, and reduce services for the elderly, blind and disabled.  Hey, they don’t have lobbyists, right?  And this proposal somehow snuck into the package:

• Relaxing some state labor regulations dealing with meal and rest periods, overtime exemptions and work schedules.

Hey, it wouldn’t be a Republican plan if there wasn’t some giveaway for business.

There is no question that the state’s finances are in the worst shape since the Great Depression.  But those Californians doing well have shown, as Robert notes today, a desire to pay for those services that can make this a great state.  It’s aberrant for people who are wealthy to pull up the drawbridge and have no concern for the least of society.  Their continued economic good fortune depends on the stability and security of all citizens, as a rising tide lifts all boats.  We have been in a constant state of economic crisis for going on eight years because nobody will admit what needs to be done – to have a revenue structure that doesn’t reflect the boom-and-bust cycles of the greater economy.

A couple of the things that Schwarzenegger is doing make sense.  He is calling for a 90-day moratorium on foreclosures so lenders can work out loan modifications with borrowers, something President-Elect Obama has already proposed and which will improve our economy (a foreclosure costs something like $250,000 a piece to the economy).  And his proposal would speed public works programs as a kind of statewide stimulus package.  But the very first thing that can be done is to reinstute the automatic VLF increase that Arnold cut and is now scrambling to cover, which would cost the equivalent of $12 a month for most Californians.  But Robert Lehman at SEIU has outlined a new progressive version of the VLF that I think would increase revenue and help protect the climate.

Dedicated Revenues. VLF revenues, based on up to 0.65% of vehicle market value, are dedicated (CA Constitution Article 11, Sec. 15, implemented by Proposition 47 in 1986) to cities and counties; some additional VLF revenues above 0.65% may also be partly dedicated to cities and counties, depending on current statutes. It is unclear whether additional revenues from a vehicle GHG-emission-based component of the fee, rather than the vehicle market value, might be obligated to cities and counties. GHG component revenues should be made available for other dedicated purposes, such as improving State transportation GHG emissions through R&D, energy infrastructure improvements, transportation equipment subsidies or incentives, etc.

Progressivity. The VLF is currently based on a flat 0.65% rate applied to the current estimated market value of the registered vehicle. Owners of newer and more expensive vehicles with higher current market values pay higher level fees, while owners of older and less expensive vehicles pay less.  People without vehicles who use mass transit, bicycles, or other forms of transportation do not pay the fee. The 2003 reduction of the VLF heavily benefited Gov. Schwarzenegger for example, with his ostentatious fleet of Hummers, while mass transit riders did not benefit at all.

With this flat fee structure, the VLF still absorbs a larger share of low-income vehicle owners’ household income than it does for upper income Californians; the VLF’s moderate regressivity is similar to that of the sales tax in terms of its relative burden on the lowest income quintile compared to the upper quintile (see UCB Incidence paper below, and CBP, “Options for Balancing the Budget: Reinstating the Vehicle License Fee,” 5/8/02, p.2). A more progressive alternative exists. Rather than assessing the fee on the full value of the vehicle as California has done, Virginia exempts the first $5,000 of vehicle value, making the fee more progressive. With a $5,000 exemption, for example, an estimated one third of California vehicles would be exempt from the VLF and owners of slightly higher value vehicles would pay significantly less. The exempt value could be adjusted over time. A restored VLF should initially be based on vehicle value, with a significant deductible amount from this value, and a rate probably set above 2% to compensate for lost revenue.

This is a smart idea and should be the first counterpoint that the state Democrats propose.  At some point we must start raising revenue sensibly.  Furthermore, doing anything before December 1, when a net of 2 new Democrats in the Assembly and possibly 1 new Democrat in the Senate join the team in Sacramento, would be ridiculous.

Cross posted on: myDD

… Let’s face it, we can only have a stimulus package if the President is willing to sign one.  But we can only go as far as the President will sign.

That’s House Speaker Nancy Pelosi starting the negotiations on a second stimulus package by giving away the farm.

There’s an old story in Texas about a young man whose daddy has sent him to trade horses on his own for the first time. He meets a wise old sharpie and the guy says, “So how much do you want for that horse son?” The kid answers: “Well Daddy told me to ask for $100 but to take $50.” “That’s great kid, here’s $50, give your daddy my regards.”

That’s what the Congressional Democrats do EVERY TIME.

While every stop is being pulled out to save the Wall Street “Masters of the Universe”, state governments across the nation are being pulled into an economic black hole. It’s no surprise that President Bush doesn’t care, but its very frustrating to see Pelosi being complicit in his indifference.

She’s apparently telegraphing her willingness to throw the states over the side. Why not make the most unpopular president in history veto a bill that would be popular just in time for the election?

Not having a vote on a strong economic recovery package is bad politics. Bad terrible awful dumb politics.  What’s the point of electing Democratic Members to Congress if they won’t stand up for Americans even when the President won’t?

Newsflash to the Democrats on Capitol Hill, this is the perfect time to force some Republicans up for re-election to put themselves on the record as opposing a package to save the economy.

But Pelosi doesn’t get that concept. Instead she wants to pass something on the first go and she’s so eager to please the president that shes pre-gutting a second stimulus package. Even though she’s talking a good game to the press:

Pelosi renewed her vow to try to pass a stimulus measure that would combine billions of dollars for jobs-producing infrastructure projects, more food stamps, additional Medicaid aid to states, home heating subsidies and a further extension of unemployment insurance.

Persistent rumors from Capitol Hill indicate that she’s telling the White House that she’s willing to throw the Medicaid aid to states overboard.

Should we settle for a bill that only goes halfway in addressing the economic crisis? No. We did that once, earlier this year, and the first stimulus package failed.

This has been on the table for a long time. The same experts who said the first economic stimulus package failed also said aid to states needs to be in the next stimulus:

If a second round of stimulus is necessary, other options that should be on the table. These include payments to states that will need to cut spending because of balanced budget provisions as their tax revenue falls.

And in a letter to House Leadership in late January as the first stimulus package was being prepared, a bipartisan group of 39 Governors “requested that state aid be included in the stimulus:

The nation’s governors urge you to include state countercyclical funding as part of your legislation to stimulate the economy.

…

In 2003, Congress approved $20 billion in assistance to states, including $10 billion in Medicaid and $10 billion in block grants. The governors’ current stimulus proposal is essentially the same, with the exception that it is a total of $12 billion as opposed to $20 billion. This proposal can be enacted quickly, as there is precedent and it is timely, temporary and targeted.

The plan is there, we know what is needed to help dig us out of this economic muck, and potentially shield the states from further dramatic losses if Wall Street keeps acting up. Our mentality shouldn’t be “take what we can get” it should be “this is what we need, this is what will pass.” If Republicans want to vote against improving the economy, let them explain it to the voters.

It’s time to have a clear vote on a real, working economic stimulus package. It’s time to show voters there’s a real difference between Democrats and Republicans.

Cross posted at myDD

A week after the the Washington Post completely botched their assessment of a second stimulus package, the New York Times turns around and nails it.

Their editorial entitled "No End in Site" lays out perfectly what the next few steps should be to help the economy whether this current storm. They begin by stating the obvious:

Lawmakers need to start crafting the next stimulus bill — without repeating the mistakes of the last one. Composed mainly of tax rebates, as the White House wanted, the first stimulus was too broad to deliver a powerful punch.

Amen. It is clear that the first round of stimulus checks didn't work. The editorial then confirms what many experts have been saying is a real potentially relief-filled measure that Congress needs to take with the second stimulus package:

The next package has to focus on actions that are known to yield big economic benefits: bolstered food stamps, which rapidly boost consumption; and aid to states and cities so they can continue to provide essential services.

Lawmakers should also invest in infrastructure projects, like repairing bridges and roads. If not, projects that are already under way may have to be canceled, creating more unemployment.

Thank you. The fact that state and city governments are not asking for money to continue radical spending on pet projects, but instead to protect essential services like education and health care seems to be lost on the minds of those who are not in favor of including state aid in a second stimulus package. Every week there are stories upon stories of states being forced to slash budgets, pay, and jobs. They are a linch pin of the economy and no one seems to notice. And investing in infrastructure will ensure that we don't add thousands of workers who make their living off of said infrastructure projects. The construction industry has been hit hard enough as is.

The editorial also touches on a response to the home foreclosure crisis:

Congress also needs to ensure that a $4 billion grant to states and cities to buy up vacant properties is quickly and efficiently distributed. The Department of Housing and Urban Development is developing the formula for allocating the money, and early indications suggest it is on top of the process. But the White House is contemptuous of the grant, calling it a gift to speculators when it is actually a lifeline for ailing communities.

If you aren't a Bush republican who just hates any sort of aid not aimed at the highest income bracket, then the main criticism of this effort is that is simply not enough to have an impact on the housing market. Whether or not this is true remains to be seen, but it is still $4 billion to help turn foreclosed properties that the states with said properties currently do not have. In that regard it is a stabilizing factor, even if it is not the stabilizing factor that ultimately turns the foreclosure crisis around. As the editorial says, it is a lifeline for ailing communities who simply do not have the money do to anything with these foreclosed homes.

The time for action is now, but because Congress is in recess the time for action will actually be September. The article suggests the difficulty with creating a second stimulus package in an election year, but brings up the most important point of them all:

Millions of Americans are already suffering. And we fear millions more will be hurt before this crisis ends. They cannot wait until after the election for help.

A very valid point. It's hard to care about battleground polls, attack ads, and town halls when you're losing your job and your home.

Californians know how important a second stimulus is, which is why it is so frustrating when publications closer to the city where these decisions are made fail to understand or simply neglect many of the facts associated with a second stimulus package.

Last week the Washington Post Editorial Board came out with an editorial blasting a second stimulus package as an unnecessary election year ploy:

We understand the political logic of a second stimulus; the economic case is less convincing. Any fiscal stimulus must be targeted, timely and temporary. That is, it must put money in the hands of people who are likely to spend it quickly — while not committing the federal government to new long-term spending.

Naturally to make their case the Ed Board selectively picks and chooses which parts of the stimulus package to highlight.

House Speaker Nancy Pelosi has called for a $50 billion package, possibly including increases in food stamps and home heating assistance as well as more Medicaid money for states and new infrastructure spending. Fleshing out Ms. Pelosi’s concept, Senate Appropriations Committee Chairman Robert C. Byrd (D-W.Va.) has unveiled $24 billion in proposed energy, infrastructure and disaster relief money.

We’ll move beyond the fact that many people think supplemental medicaid funding is a really good idea to the more pressing point; the Wapo Editorial Board failed to mention or mention only in passing two plans that many experts say should be the staples of any second stimulus package; aid to states and infrastructure spending. AWall Street Journal article from last month (subscription only) shows Congressional leaders getting on board with the idea so I am lost as to why it received no attention in the Op Ed:

The bill, which would likely include spending on road projects and aid to stated, isn’t expected to come up in the House until September

We proved earlier this year that stimulus checks on their own are not the solution to the nation’s economic woes. However not recognizing the obvious need for help that states have been screaming about over the last several months is just irresponsible. Not to mention their editorial reads just barely on the sane side of illogical.

Their suggestion that we don’t know the effects of the first stimulus yet is asinine. The Post even admitted this on Thursday. On page 10 of the Washington Post Express they ran an article entitled “Stimulus Checks Run Out”

Analysts said retail sales would have been more feeble without the $92 billion in rebate payments the government sent out in May, June, and July. Those checks helped to counter plunging home prices, rising unemployment, and soaring gasoline prices.

The bulk mailings are now over, though, leaving economists worried about what will happen next.

WaPo can’t have it both ways. They can’t report that the stimulus checks are running out but then opine that we shouldn’t have a second stimulus because we don’t know the effects of the first.

And sure gas prices have been falling over the last couple of weeks, but today’s national average for a gallon of gasoline is still $3.77. Am I glad its down from the high of $4.11 that we saw in mid July? Yes. Am I convinced that this means I don’t have to worry about gas destroying my wallet? Absolutely not.

According to the Fuel Gauge Report, gas is still $4.07 in California where their budget crisis has gotten so bad that over 200,000 state employees had their pay rolled back to minimum wage. It’s $3.89 in Michigan, where unemployment is skyrocketing. Its $3.98 in New York where Governor Patterson has been forced to slash medicaid by $500 million this year and $1 billion next year. The relief at the pump will be short lived because state governments don’t have the resources to ensure normal citizens won’t feel the pain of floundering state economies.

The Washington Post should know better. After all, the situation is going from bad to worse in their own back yard. A Richmond Times Dispatch article has Governor Kaine says the budget shortfall could surpass $1 billion. This coming on the heals of cutting $2 billion out of the budget this year. He says he’s going to apply the same formula:

Kaine said he probably would apply the same basic principles to the next round of economies that he did previously — to not cut across the board but target more precisely areas that can be reduced. Some lawmakers and lobbyists aren’t sure that’s possible.

I’m not sure thats possible either. There are a limited number of areas that can be reduced before you start having to cut education, public safety, health, and other essential services. We may be months away from the endgame, but counties and cities are bracing for the worst.

“We expect, and are preparing for, very bad news,” said Michael L. Edwards, a lobbyist for the Virginia Association of Counties.

What the Washington Post fails to understand is that dealing with the nations economic problems has to go beyond fixes for the individual. I would love to receive another check in the mail but it’s not what’s going to fix this thing. The real solutions lie in federal aid to the states and spending on infrastructure, two moves that will help states who are being forced to make dramatic cuts to essential services and potentially create jobs in states were there are far two few of them. These solutions received little to no attention in the Op Ed, which is really the biggest flaw of all in the piece.

Matthew D. Shapiro and Joel Slemrod of the University of Michigan know what they’re talking about. They wrote what many consider to be THE paper on the 2001 stimulus payment and now, according to the Wall Street Journal Real Time Economics Blog, have taken a look at the preliminary data on the 2008 stimulus payments. Where did the money go? It’s not too surprising:

The change in the personal saving rate corresponds closely to the size of the rebate as a percentage of disposable income. The figure shows how most of the rebate payments appear to have gone straight into saving.

Which is clearly not what President Bush had in mind when he drew up the checks in the first place.

That most of the rebate checks were saved is, though, consistent with the results we find using the University of Michigan Survey of Consumers. When consumers were asked whether their stimulus check would lead them to “mostly spend, mostly save, or mostly pay down debt,” only 18% answered that it would lead them to mostly spend more.

That statement is also pretty much in line with what has been reported in the past couple of months. Still, many have been hearing reports recently that feature consumers talking about how they are spending their rebate checks, making some question whether or not it had more of an effect than originally thought. Shapiro and Slemrod don’t buy this argument all the way:

Does such consumer behavior correspond to spending that would stimulate the economy? That depends on what the consumers would have done if they had not received the rebate check. If they would have not made those purchases absent the rebate, then the rebate was spent. If the rebate let them avoid running up higher credit card bills for gas and groceries they would have purchased even without the rebate, then the rebate was saved.

Thus the rosy predictions of Americans flocking to stores to spend their rebate checks may not necessarily indicate that they are having the desired effect of stimulating the economy. And what is their overall analysis of how this first stimulus package worked out?

Nonetheless, the rebates are likely to be less effective in stimulating the economy than policymakers had hoped.

In reality Shapiro and Slemrod only add another reliable source to the masses who have highlighted the failure of the first stimulus package to boost the economy. They also join another group that has been picking up steam lately; those who think investing in the states should be a central tenant of any new stimulus package:

If a second round of stimulus is necessary, other options that should be on the table. These include payments to states that will need to cut spending because of balanced budget provisions as their tax revenue falls. Additionally, policymakers should consider increased infrastructure investment on items such as roads and bridges.

Both of these are great ideas. Though they ask the question, is a second round of stimulus necessary? All I can say is look around.

Here in California the state budget impasse is rounding the track on its 6th week (they were supposed to have something figured out by July 1st.) Governor Schwarzenegger has been favoring scare tactics over real negotiation with state Democrats. Ask the 200,000 state employees who had their salaries reduced to minimum wage if they think a second round of stimulus is necessary. Ask the 10,000 plus seasonal and student workers who lost their jobs if they think a second round of stimulus is necessary.

In New York, Governor Patterson is calling the state legislator back into session to address a projected $6 billion budget gap next year and a gap that could ballon to $26 billion in three years. They say everything is on the table for cuts. I’m sure they could use a little help.

These are just two of countless examples of states in need of some aid. Here’s to hoping that when Congress comes back into session next month they do so with the recommendations of Mr. Shapiro and Mr. Slemrod in mind.

(bumped, you gotta see Rangel… on the flip. – promoted by David Dayen)

Yesterday the House came very close to passing a bill extending unemployment insurance for 13 weeks.  Under suspended rules they needed a 2/3 majority to advance the bill, and they came up 9 votes short.  They might as well have gone for the 2/3 vote right away, because Bush is likely to veto the bill.  And every rubber stamp from California’s Republican House delegation voted with the President.

Bush claims unemployment is not high enough and the economy not bad enough to justify extending UI for workers who can’t find new jobs. Yet the total number of long-term unemployed is higher than it was the last two times Congress enacted federal extension programs (October 1991 and February 2002). In addition, joblessness is growing. May saw the biggest one-month jump in the unemployment rate in more than 20 years.

Right now, some 1.55 million workers have used up their benefits without finding work and the Congressional Budget Office (CBO) estimates about 3.5 million unemployed workers will exhaust their benefits this year.

You can’t come up with a more effective economic stimulus than extending benefits for long-term unemployed Americans who need it the most.  That money gets directly injected back into the economy and makes far more sense than giving random $600 checks to everyone.  It’s targeting with a laser and not a cannonball.

Americans United For Change blasted California Republicans prior to the vote.

“Voting to extend unemployment benefits to nearly 702,000 California workers is the very least Reps. Dreier, Bilbray, Bono, Calvert and Rohrabacher could do after voting time and again to enable President Bush´s failed policies that have contributed to and even exasperated the economic downturn,” said Jeremy Funk, spokesman for Americans United for Change. “The U.S. economy is slipping further and further towards recession after five consecutive months of negative job growth. We understand that Reps. Dreier, Bilbray, Bono, Calvert and Rohrabacher believe that more Bush tax cuts for millionaires are the only prescription for the ailing economy – tax cuts that never manage to ´trickle-down´ to the people who really need it. But, we hope they can make an exception this time and vote to extend a helping hand to the Californians hit hardest by the Bush economy.”

They chose to stand with Bush.

The Democrats are going to try this one again.  It’s so mind-bendingly simple that there’s probably no way that these California legislators come to their senses and vote in the interests of struggling out-of-work constituents instead of the President they adore.

UPDATE: This just passed the House under normal rules (meaning it needed just a majority vote).  The count was 274-137.  Yesterday was 279-144, so a handful of Republicans took a walk today.  Roll call isn’t up yet…

…My bad, 274-137 is exactly a 2/3 majority, so they got this through under suspension of the rules.  The roll call is up, and sure enough, all CA Republicans voted against it again.  Challengers, feel free to blast your opponents.

UPDATE: Watch Charlie Rangel open up a can of whoop-ass on David Dreier.  Here’s a fixed version of the YouTube.

I wrote last week about the failure of President Bush's economic stimulus package to stimulate anything beyond public opinion polls that prove its worthlessness and longer lines at food banks across California.

And with little of the stimulus package actually making it into the economy, states are still being forced to cut their FY2009 budgets to weather the slow economy.

The plight of states being forced to slash away at their budgets has been well chronicled this year, but on Sunday Louis Uchitelle wrote a piece in the New York Times about the broader implications of state cutbacks on spending. After highlighting the many crises caused by the economic failures of the Bush administration including a housing bust, credit crunch, shrinking level of consumption, rising unemployment and faltering business investment, they discuss one prop that’s holding up our failing economy:

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

This article goes on to enumerate the kind of impact state budget cuts are really going to have on the economy:

At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles.

In some states like California, the budget cuts and their negative consequences are already set in stone.

“We are looking at a $4 billion cut to public schools and deep cuts that will result in thousands of Californians losing their health care,” said Jean Ross, executive director of the California Budget Project, offering a preview of coming hardships. “But the reality is we have not pulled money off the streets yet.”

But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment — slowly at first and then quite noticeably after the next president takes office.

The results of this slow down in spending could end up leaving little doubt as to whether or not the United States is in a full fledged recession:

Sometime next year, the decline will reach an annual rate of $50 billion, Goldman Sachs estimates. “It is a big reason to expect a weak economy in 2009,” said Jan Hatzius, chief domestic economist at the firm.

The $90 billion swing — from more spending to less — could be enough to push down a weak economy to zero growth or less, because state and city spending has accounted for as much as half of total economic growth since last fall.

Yet despite all of this there is a glimmer of hope if the federal government takes the proper course of action, which is hardly a given with the Bush administration. The answer is actually very simple:

…the next president, struggling to revive a weak economy, will almost certainly have to consider a second stimulus package.

But what should it be? Should it be a reprise of the checks, relying again on private-sector spending for rejuvenation? Or should Washington channel extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk? The answer, even on Wall Street, is often: subsidize the states and cities.

In creating the first economic stimulus package the government erred in assuming that the general public would spend most if not all of their rebate check and thus a significant portion of the stimulus package did not make its way back into the economy. In reality there is only one way to make sure that aid from the federal government gets spent. On giving money to the states:

“If you want to make sure that federal money gets spent, and jobs are created, you give it to them,” said Nigel Gault, chief domestic economist at Global Insight, a forecasting firm.

Like many others, Mr. Gault contends that more than 50 percent of the $107 billion in stimulus checks now going to households is likely to produce no stimulus at all. Instead, it will be used to pay down debt or buy imported goods and services. Imports bolster production in other countries; not in the United States.

Government has to step in, Keynesians argue, when private spending is not enough to lift the economy, despite the nudge from tax cuts or lower interest rates or rebate checks. This downturn might be one of those moments, involving as it does the bursting of a huge housing bubble. That has precipitated sharp declines in various tax revenues on which the states and cities depend, forcing them into extraordinary spending cuts.

The GOP propaganda machine would have you believe that the federal government stepping in with aid to the states would lead to nothing more than radical, out of control spending sprees on various projects that are not needed. Any rational person however would understand that this money would go towards ensuring states don't have to dramatically slash their budgets in a way that could wreck the economy, not starting new projects.

And for anyone who may be wondering which programs could use a little help, here is a great place to start.

Stateline.org wrote today about another potential crisis; unemployment benefits:

More than a dozen states would be hard-pressed to provide unemployment benefits if the economy tailspins into a full-blown recession and more workers get pink slips.

What happens if the unemployment trust funds run out of money? People will still get their benefits, it would just put an even heavier burden on the states:

If a state unemployment insurance trust fund runs out of money, unemployed workers would still get their benefits, but the state would have to borrow the money from the federal government and pay it back with interest. Such a scenario would burden those states that are already cash-strapped and borrowing heavily to balance their budgets without having to raise taxes.

This is not a small problem either, there are already four states in seriously trouble, and 14 more that could join them:

Michigan, Missouri, New York and Ohio could face the biggest problems since the amount of money in their unemployment insurance reserves already are far below recommended levels…

States that are also well below the recommended level with only about six months of money in their reserves are: Arkansas, California, Illinois, Indiana, Kentucky, Minnesota, North Carolina, New Jersey, Pennsylvania, South Dakota, South Carolina, Tennessee, Texas and Wisconsin.

Suggesting that the federal government do something to help the states with potential unemployment benefit crises is not outlandish. The program is already a joint federal-state program with joint funding by federal and state employer payroll taxes and the states administering the program. This also wouldn't be the first time that the federal government has stepped in to help the program. It was done in 2002 with considerable success

Most states’ UI trust funds weathered the 2001 recession, first because they went into the recession with more reserves than they have now. But Congress also helped in 2002 by transferring $8 billion from the federal UI trust fund to the individual state UI accounts.

If states are more strapped for funds now than they were in 2001, then it would seem that federal aid would be even more necessary today than it was 6 years ago. Especially if you factor in the slower economic growth rate and the number of people who are considered "long-term unemployed." Naturally this fact is lost on the Bush Administration. In today's episode of "inexplicable Bush administration economic policies that are destroying the country as we know it:"

Congress is once again considering helping states cover UI claims, but the measure has drawn a veto threat from President Bush, who has said such a move is too costly and premature.

Really? A move that would prevent the states from having to borrow money from the federal government at astronomical levels to balance the budget is too premature? The federal government can bail out Bear Stearns for $30 billion, but it can't provide states with the money they need to maintain unemployment benefits? Fortunately Congress doesn't have the same failed conservative talking points blinders on as the Bush Administration:

Before recessing for the Memorial Day holiday, the U.S. Senate passed, by a veto-proof margin, a measure that would extend unemployment benefits by 13 weeks for all workers and provide an additional 13 weeks for workers in high unemployment states. Unlike traditional UI benefits that are financed through federal and state payroll taxes, the federal government would pay for all of the extended UI benefits, estimated to cost $11 billion.

Thankfully there are some out there who understand the true role of the federal government is to step in when the states need it to the most, and right now state and local governments are cash strapped and desperately trying to avoid slashing essential services and programs out of their budgets. Let's hope more bills like this become the prevailing wisdom on Capitol Hill.