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Back in October, Ezra Klein of the Washington Post warned of the "anti-stimulus."  That is, the draconian budget cuts and steep layoffw at the state and local level, Klein argued, were more than offsetting the gains from the $787 billion federal stimulus program.  Now, a new analysis from the National Bureau of Economic Research - the same group which declares the official beginning and end of U.S. recessions - is just the latest to confirm Klein's thesis.

The NBER compared the American stimulus response in the face of the recession to those of other leading industrialized countries.  The conclusion?  The combined recovery efforts of federal, state and local governments were relatively meager, to say the least:

Overall, we find that the USA net fiscal stimulus was modest relative to peers, despite it being the epicenter of the crisis, and having access to relatively cheap funding of its twin deficits. The USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries in sample.

As Paul Krugman explained, "Once you take state and local cutbacks into account, there was no surge of government spending."  Looking at his graph showing the past 10 years combined spending at all levels of American government, Krugman lamented, "If you didn't know there had been a 'massive' stimulus, would you even have suspected that there had been any stimulus at all?"

In the span of just a few days in December, the Washington Post, the New York Times, Reuters, Bloomberg and the Wall Street Journal described the fiscal triple-whammy facing the states. Even with spending now well below 2008 levels, the downturn-induced drop in revenues and increased demand for social services coupled with the looming end of the American Recovery and Reinvestment Act (ARRA) is producing yawning gaps in state budgets. And the states, all but one of which must balance budget each year, are responding with sharp spending cuts, massive layoffs and deferred payments to state employee pension funds.

The result is that the Republican myth about the out-of-control expansion of the government work force is just that - a myth.  As Krugman again showed in one simple chart, with the exception of the brief jump to conduct the 2010 U.S. Census, overall employment at the federal, state and local level is now lower than when the Bush recession began in December 2007:

The scope of the crisis - and the threat to the American recovery - has been evident for months. Economist Stephen Gordon warned in June that "that total government spending has been a drag on growth over the past two quarters" because "the increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels." By October, as David Leonhardt summed it up in the New York Times:

Local governments are cutting jobs at the fastest rate in almost 30 years.

They cut 76,000 jobs last month and over the last three months have cut 143,000 jobs, many in education, according to today's jobs report. That's 1 percent of total local-government employment across the country. Since the Labor Department began keeping records in the 1950s, the only other time that the cuts were so steep was in the harsh 1981-2 recession.

By November, state and local governments had shed 407,000 jobs (-39,000 state, -368,000 local) since their peak in August 2008. With state budget shortfalls estimated to top $100 billion for each of the next two years, analysts including Moody's Economics and the Center on Budget and Policy Priorities have forecast more state and local job losses reaching between 400,000 and 900,000.

It was that dismal reality in the states which led Ezra Klein to declare them the "anti-stimulus" last fall:
The government is now impeding an economic recovery. But it's not for the reasons you often hear. It's not because of debt or because of taxes. Nor has it scared the private sector into timidity. It's because, at the state and local level, it's firing people. There are more than 14 million Americans looking for work right now -- to say nothing of the 9.5 million who have been forced into part-time jobs when they want, and need, full-time work -- and the government just added 159,000 more to the pool. Consider this: If we only counted private-sector jobs, we'd have had positive jobs reports for the last nine months. As it is, public-sector losses have wiped out private-sector gains for the past four months.

In December, both the National Conference of State Legislatures and the National Governors Association sounded the alarm that worse was still to come. In its report, the NGA described a $65 billion "cliff" facing the states despite further cuts already made this year:

One of the clearest signs of state fiscal stress are mid-year budget cuts as they highlight the difference between budgeted levels of spending and forecasted revenue collections. For fiscal 2010, thirty-nine states made $18.3 billion in mid-year budget cuts. Thus far for fiscal 2011, 14 states have made $4 billion in cuts. In 2009, 43 states cut $31.3 billion and in 2008, 13 states made $3.6 billion in mid-year cuts.

Even with state and local government revenue finally starting to increase with the improving economy, as the Wall Street Journal noted, "states are likely to seek fresh cuts or new taxes to bridge the gap."  Why?  Because of the nearly $40 billion falloff in federal stimulus aid starting in July.  As budget analyst Arturo Perez of the National Conference of State Legislatures put it:
"Although revenue is improving, it's not enough to offset the loss of federal dollars."

And as the New York Times noted last week, "So many people now receive jobless benefits that 30 states have run out of their unemployment trust funds and are borrowing $42 billion from the federal government."  Which is why President Obama's budget is proposing short-term relief to states "saddled with unemployment insurance debt, coupled with a delayed increase in the income level used to tax employers for the aid to the jobless."

Republicans in Congress, of course, are against all of it.  Hoping to punish Democratic-voting states and their public employee unions, GOP leaders have urged legislation to enable state and local governments to declare bankruptcy.  As House Budget Committee chairman Paul Ryan put it, "We are not interested in a bailout."

Meanwhile, the federal stimulus program pushed by President Obama and his Democratic allies continues to pay dividends.  (Despite their complete opposition, Republicans are now trying to claim credit for the growing recovery it produced.)  Over the past year, the U.S. economy added 1.1 million new jobs overall, including 1.3 million in the private sector, which enjoyed 12 straight months of growth. By last June, the nonpartisan Congressional Budget Office (CBO) estimated the Obama stimulus program had saved or created up to 3.3 million jobs, lowered the unemployment rate by as much as 1.8% and boosted GDP by 4.5%. A recent analysis of Census data by the Center on Budget and Policy Priorities (CBPP) revealed that federal programs kept 4.5 million Americans out of poverty in 2009. For his part, former John McCain adviser Mark Zandi in August concluded that the combined federal interventions beginning in the fall of 2008 prevented the Great Recession from becoming Depression 2.0.  Looking at future quarterly growth rates now expected to top 3.2%, an upbeat Zandi announced in January:

"This growth is now becoming self-reinforcing. Businesses are going to take their stronger sales and begin to hire more aggressively, generate more income, and we're off and running."

But among the potential barriers that take off is the dismal financial condition of states, cities and towns across America.  Surveying the data for the past year and the grim future fiscal landscape, Derek Thompson of The Atlantic warned:

"The biggest job killer in 2011? Cities and states."

* Crossposted at Perrspectives *

Originally posted to Jon Perr on Tue Feb 15, 2011 at 04:55 PM PST.

Also republished by Jobs Wages and Community Investment Working Group.

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