In case you missed this Bloomberg report on Friday, it's worth a read.
Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.
"States are going to have to cut back spending and raise taxes the same way Greece and Spain are," says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. "That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year."
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State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged.
States are now trying to create budgets for the next fiscal year--starting next week--without the key funding extension that was included in last weeks failed jobless benefits bill. That funding, called FMAP, provides Medicaid, SCHIP and other safety-net support, and represents a huge chunk of most states' budgets, usually being the "second large line item in state budgets following elementary and secondary education."
Without this aid, which Olympia Snowe in particular has been hostile toward (despite her new-found religion on jobless benefits), states are in crisis. They've cut the fat out of their budgets, long ago. They've cut the meat. Now they're sawing at the bone. And with states in crisis, with unemployment hovering close to 10 percent, there's no chance we get out of this recession.