One Hand Taking Back What the Other Is Doling Out

Leaving aside the question of whether those who expect a repeat of what happened eighty years ago will be proved correct, they have been right about one thing. At least some of the trillions of dollars of monetary and fiscal stimulus that has been thrown at the economy to "rescue" it has been offset by contractionary fallout from the bursting credit bubble. Money has been sucked into deflationary chasms that have opened up in the wake of debt defaults, loan repayments, and a rising tide of red ink. Some of stimulative impact has also been neutralized by procyclical forces that have wreaked havoc with municipal finances. In some respects, what Reuters details in "State, Local Budget Cuts a "Time Bomb" for Jobs" is a bit like one hand of the government taking back what the other is doling out:

Budget shortfalls pose a direct threat to millions of U.S. jobs, many in the private sector, as state and local governments lay off workers and cut spending on contracts and other business services, a think tank said on Thursday.

State and local governments will have to raise taxes and cut spending in the current and next two fiscal years to cover shortfalls totaling $469 billion, according to an Economic Policy Institute report.

The think tank -- where White House adviser Jared Bernstein spent years developing ideas found in the $787 billion economic stimulus plan he oversees -- said the U.S. government must give states and cities $150 billion in direct budget relief to save between 1.1 million and 1.4 million jobs.

"Given the fragility of the economy, already high unemployment and the magnitude of the budget shortfalls, it is clear that we cannot afford inaction," the report said, calling the gaps "a ticking time bomb for the economy."

While many economists believe the worst recession in decades ended recently, cities' budget deficits are expected to continue at least through 2012.

"The low point for cities typically comes 18 months to 24 months after the low point for the recession," said Christopher Hoene, research director for the National League of Cities, at the Brookings Institution in Washington, D.C. on Thursday.

States, too, face future hardship, with the National Governors Association recently saying they are at the beginning of a "lost decade" of budget struggles.

Those struggles will trickle out to the private sector, EPI said. According to its estimates, for every dollar of budget cuts, more than half the jobs and economic activity lost will be in the private sector.

When asked at the Brookings meeting about the aid their cities need most, four mayors representing both political parties and cities large and small said the federal government must make credit more available to small businesses.

"I'm not looking for a sugar high," said Mayor Scott Smith, a Republican from Mesa, Arizona, about direct federal aid that could be withdrawn after a short time. "On Main Street the credit market is completely shut off."

If banks were to lend again to small businesses in her town of Bowling Green, Kentucky, then businesses would hire more people, increasing the city's income tax and job fee collection for years, said Democratic Mayor Elaine Walker.

SPENDING CUTS SLASH NUMBERS OF WORKERS

State governments, too, have had to lay off workers, shedding 26,000 jobs from October 2008 to last month, according to the Labor Department.

But nearly one-third of state spending goes to public provisions such as infrastructure, which is usually awarded to private contractors, said EPI, which says it is an independent nonprofit nonpartisan institute that researches the impact of economic trends and policies on workers.

Direct government services, such as fire departments and education, also affect the private sector through supply orders.

Bernstein, speaking at the Brookings meeting, said that without the stimulus plan passed in February, job losses would have been deeper. When indirect spending is taken into consideration -- on things such as equipment for the roads projects in the bill -- the stimulus was responsible for more than 1 million jobs, he said.

The plan has already allocated about $144 billion in relief to state and local governments, which has likely saved at least 360,000 jobs, EPI said.

Most of that money has gone to state governments and has yet to reach cities and counties. Cities have only seen direct help through community development block grants to combat blight and police force funding. They also will soon receive grants for energy efficiency.

And while they would like to see credit flowing, the mayors said they also need some direct stimulus.

"I have no complaints, other than I can't use a dime for budgetary challenges," said Philadelphia Mayor Michael Nutter, about the stimulus.

"On one day we could announce ... in the morning a new grant opportunity from the federal government and later that afternoon announce more layoffs and service cutbacks. The public is confused," he said.

Comments

[roger]

those who expect a repeat of what happened eighty years ago,make a big mistake.
The changes taking place to day are much deeper and significant. 80 years ago it was the beginning of the realignment of the western powers,and the end of colonization,all European powers where dethroned and replaced by the US. To day this last beacon of Anglo Saxon domination is now over. The old colony's of the past are now calling the shots, to make things worst.it,s not just a matter of
exploitation but it,s who is going to dominate the world's dwindling resources add to that some serious ecological problems. Contradictions abound in the world .
Because culture makes an imprint on the human mind and block's all positive thinking
I don't have much hope.
,

[HSpencer]

For people who are unemployed, have no money, and nothing going on right now, here is an idea. If you live in a town or city of the United States, go outside and pick up some trash. Get your city to budget money for trash bags, rakes, brooms, paint and brushes, and soap and water. Get out and clean up your city, and your own place you live. Get your Mayor to begin raising hell with people whose homes look like a slum dump. Get him/her to begin a campaign to fine or jail people who litter your streets. If you see a piece of trash go get it. If brush is clogging the ditches, go get it out. If eyesore buildings are destroying the look of your area, paint them, fix them, or tear them down. Get your Fire Chief to agree to holding controlled burns to rid the city of debris. Do something about it. This improves your life greatly, gets your off your butt from despairing about things. Like the stupid HGTV says, "You can do it, start at home".
Despair over the economy breeds despair over your surroundings. If you live in a cardboard box, make it the sharpest cardboard box in your town. Get some pride Americans!!! Take back your life! Your city may be broke in the pocketbook, but this CAN be done. Otherwise every town will be a "Detroit".

[HappyDebtor]

We should not worry about the U.S. public debt.

Italy has a public debt of 103% of GDP and its economy continues to grow, and everyone is happy.

The U.S. public debt is only 60% of GDP. There is no reason to worry.

[Karen]

HappyDebtor, what percent of the Italian public debt is the U.S. public debt? I.e., how do the totals compare? Don't forget, at similar percentages of GDP the USA needs a lot more investors to buy its debt than Italy does.

If, say, China pulls out of the Treasury market and starts buying other assets (corporate bonds or shares, real estate, or who knows what) instead, who is big enough to fill that gap?

Of course, the Fed could step in again with its "funny money," but at some point the whole world would lose confidence in the Fed's exit strategy and we would get to experience a capital-flight debt-default crisis just like so many South American countries have. On the plus side, it would be an automatic solve of the budget-deficit problem (no more deficits). On the minus side, of course, there would be total chaos - and a LOT more unemployment.