Tuesday, June 15, 2010

Obama to Congress: State & local governments need $$ from the federal government?

It is no secret that, despite the slowly recovering economy, state and local governments are hurting badly.  With stimulus money running out in 2010, many state and local governments find themselves in a precarious position, as they will be forced to make additional cuts or raise taxes in order to balance their budgets.

To that end, President Obama is pushing for more state and local aid.  In a letter to Congress, President Obama is calling for increased funding for education and health care.  However, the increased aid would unquestionably add to the national deficit, something many lawmakers are currently hesitant to do.

84,000 jobs have been lost from state and local governments in 2010 - since August 2008, that number totals a massive 231,000.

The past two year's have been very difficult for states, but they are rapidly running out of options.  Stimulus money is drying up, one-time revenue boosts have been used and many rainy day funds have been depleted.  Despite an economy that appears to be on the rebound, state and local governments appear to now be entering a new phase of their economic crisis.

1 comment:

Jon Geeting said...

The cost of additional deficit spending to lower unemployment and boost state and local budgets makes a vanishingly small impact on the long-term deficit, which is the only thing we should be worrying about. The long-term deficit is almost entirely due to unsustainable growth in health care costs. Due to the uniquely favorable terms that the US can now borrow under, there's no question that this is worth doing. Please read this Brad Delong op-ed from The Week for more. Here's the key graf:

"The financial crisis has created a configuration of interest rates that means that the government can borrow at uniquely favorable terms. Suppose we borrow at 1.83 percent – we’ll round it to 2 percent — per year in real terms for the next 30 years. On those terms, amortizing the $40 billion of additional government debt requires only $0.8 billion a year in additional interest payments and taxes. Even adding in our one-third excess burden brings us only to $1.07 billion a year in amortization costs.

Now, net all this out.

The increased cash flows to businesses boost future private-sector incomes by $1 billion a year. The costs of amortization reduce them by $1.07 billion a year. The net cost? $70 million per year. So to gain $150 billion of increased production and incomes this year we incur a $70 million a year cost going forward. That means that using expansionary fiscal policy to boost output today is an investment worth doing at any interest rate greater than 0.05 percent per year."