The current fiscal crises that most states are facing are generally the result of a severe macroeconomic downturn combined with a limited ability of the states to respond to such shocks. States are facing increased demand for public services at the same time revenue is falling. Federal stimulus support for state budgets is winding down over the next two years. Rainy-day funds are all but exhausted. Thus, state fiscal crises aren’t likely to go away soon and will probably get worse before they get better. The solutions states employ to close projected budget gaps will have painful effects on state residents and businesses but pose a more modest risk to the national recovery. Historically, the health of the national economy determines the health of state finances, not the other way around. Sustained improvement in the national economy is essential for states to grow their way out of their current problems and improve their fiscal conditions.Clearly, state governors and legislators can expect little sympathy or support from the Federal Reserve any time soon...
Source: Gerst, J & Wilson, D (2010, June 28), Fiscal Crises of the States: Causes and Consequences, FRBSF Newsletter.
2 comments:
I am intrigued by the analysts' conclusion that "the solutions states employ to close projected budget gaps will have painful effects on state residents and businesses but pose a more modest risk to the national recovery." Apparently, the Federal Reserve believes that layoffs of state workers adds only "modest" risks to national recovery -- I would love to see the numbers that support such a smug conclusion...
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