There has been a lot of discussion in recent weeks of a need for a federal fiscal stimulus to offset the contraction in consumer spending and business investment. Currently, the incoming administration is considering new expenditures of nearly a trillion dollars, a sizable portion of which will be in the form of infrastructure investments. Yet, as Paul Krugman informed today in his column, state governments are doing just the opposite. They're cutting their budgets across the board, meaning that everything from medical care to road building is getting the axe. In the end, if a fiscal stimulus will help the recovery state spending cannot substantially offset new federal outlays.
Why would they being doing this at a time when peoples' incomes are falling and unemployment in increasing? Why would they anxiety in consumer's minds? The reason is that state governments are generally not allowed to borrow when taxex and other revenues decline. Borrowing is prohibited by state constitutions. So as less people work and spend and property values decline, the states take in less money and make up for it by cutting spending.
Juan Carlos Ginarte
See Krugman's column at http://www.nytimes.com/2008/12/29/opinion/29krugman.html?_r=1&ref=opinion
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