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POLICY INSIGHT
BEYOND THE NUMBERS

Economists Confirm: State Budget Cuts Threaten Economic Recovery

A new survey of leading economists about the state budget crisis adds ammunition to the case for more federal fiscal relief. Lawmakers should take a close look and reconsider their failure to provide additional relief to date. Specifically, nearly two-thirds of leading economists surveyed by the Associated Press see the state budget crisis as “a significant or severe threat” to the economic recovery. That’s because of the actions that states must take to meet their balanced-budget requirements – actions that serve to impede the economic recovery. Here’s what is happening: As my colleague, Nick Johnson, has pointed out, state revenues have plummeted during the recession. That’s because when people lose their jobs, they pay less in state income taxes. And they stop buying, which means states take in less in sales taxes. This happened with a vengeance in this recession. As a result, states have been shedding jobs and slashing their education systems, public safety programs, and other basic services in recent years. And although the economy appears to be recovering (albeit much more slowly than we’d like), states continue to face large shortfalls this year and next. But state spending cuts are bad for the economy. When teachers and police officers get laid off, they don’t have money to spend at local shops. When states cancel contracts, those private-sector vendors have to lay off workers. It creates a ripple effect through the economy – a ripple effect that could put this fragile recovery at risk. Unfortunately, the federal assistance that’s been so helpful in reducing the severity of state budget problems up until now is set to run out before states get back on their feet. And that means more cuts ahead unless Congress steps up. In fact, states’ actions to close their estimated $140 billion in budget shortfalls without more federal aid could cost the economy up to 900,000 public- and private-sector jobs. You don’t have to be a leading economist to realize that’s the last thing our economy needs.