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COMMENTARY:

New Study Shows Ten States Face Fiscal Crisis

by Stephen Lendman
Wednesday, 25 November 2009

Don't expect this recovery to last very long. A second recession could come quickly on its heels. Leg one of the downturn may be over, but America's "long-term depression" continues.

The Pew Center on the States (PCS) "works to advance state policies that serve the public interest," through "credible research (to) advance nonpartisan, pragmatic solutions for pressing problems affecting Americans." Its new report titled, "Beyond California: States in Fiscal Peril," says the following:

"Many economists are optimistic that America's Great Recession may be turning the corner. States, however, are not celebrating. Plagued by record-setting revenue losses, the housing bust and credit crisis, high unemployment and a host of other challenges, (they've) struggled through nearly two years of budgetary pain - and are bracing for more."

California is worst off, but hardly alone. Others include Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin. Pew's Managing Director on the States, Susan Urahn, says:

"America's economic recovery and prosperity hinge in key ways on how quickly and to what degree states emerge from the Great Recession." For many, their "fiscal health hangs in the balance."

Economic, money-management, and political factors "pushed California to the brink of insolvency," but other states face the same pressures. As a result, their residents can expect higher taxes, more layoffs, reduced social services, longer waits for them, over-crowded classrooms, fewer teachers, higher tuitions, and less help for the unemployed and most needy.

The above 10 states account for over one-third of the nation's population and output. Pressures on them portend new ones nationwide. Pew scored all 50 by six factors:

Excluded were issues of long-term debt and public employee pension liabilities that darken the outlook further.

The 10 worst off states are examined, but close behind are Colorado, Georgia, Kentucky, New York and Hawaii. Only two, Montana and North Dakota, are fiscally solvent and expect to meet their 2010 budgets, the latter because it alone has what the others don't - its own bank able to create credit for state businesses and residents at an affordable cost. As a result, with the lowest unemployment rate in the country at 4%, it's created jobs at a time they're vanishing in the other 49 and the District of Columbia.

According to financial writer Ellen Brown, "In this dark firmament....one bright star shines" - in terms of GDP and personal income growth and the state's largest ever $1.3 billion budget surplus when other states face deficits.

For fiscal year 2010, some of them are coping with their largest ever budget shortfalls. Nationwide it's about $162 billion because of rising unemployment and lower tax revenues. More recently another $16 billion was added, but the numbers keep rising. Pew's data is based on the best available through July 31, 2009.

California

It's reeling from its biggest ever budget shortfall, in part from the housing bust. As it imploded, unemployment surged. Nationally it's 10.2%, the Bureau of Labor Statistics' (BLS) headline U-3 figure. The broader U-6 one is 17.5%.

BLS's September California U-6 measure is 19.6%, which includes:

U-6 calculations way understate the true picture because of BLS's so-called Birth/Death Model. In good or bad times, it regularly adds tens of thousands more small company phantom jobs, supposedly missed by monthly surveys. In the current environment, the National Federation of Independent Business reports these firms are actively cutting them. More on this below.

According to California Employment Development Department estimates through September, unemployment is 21.9% and rising. The true figure is likely higher given the gravity of current conditions.

The economic crisis took its toll on state revenues, falling by nearly one-sixth from Q 1 2008 - Q 2 2009. "California topped all states for the magnitude of its budget shortfall in fiscal year 2010...." Despite plugging a $45.5 billion hole in July, another $1.1 billion gap emerged, exacerbated by voter-imposed restrictions, including requiring all budgets be passed by two-thirds legislative majorities.

Beyond the Pew study timeline, a November 18 Los Angeles Times Shane Goldmacher article headlined, "California faces a projected deficit of $21 billion." After closing the earlier gap, new figures threaten "to send Sacramento back into budgetary gridlock and force more across-the-board cuts," but when does the process end, and what does it suggest for the other strapped states.

In 2008, Pew's Government Performance Project (GPP) rated California's money-management practices D+, lowest among the 50 states.

Arizona

Hard hit by the economic crisis, state lawmakers relied on one-time budget fixes over long-term solutions. They still haven't closed a $1 billion FY 2009 gap.

Rhode Island

With one of the nation's weakest unemployment picture, its 2008 home foreclosure rate was worst in New England. It's a problem-plague state hampered by high tax rates, chronic budget deficits, and few high-tech jobs.

Michigan

Heavily dependent on auto production, it never recovered from the 2001 recession. By Q 4 2010, it's on track to lose one-fourth of its jobs this decade, a shocking situation for its residents. The accelerated revenue shortfall forces the government to manage today with a 1960s-sized budget.

Nevada

Gambling and sales taxes provide 60% of its revenue. The economic crisis hampers both.

Oregon

Its timber, computer-chip manufacturing, and other key industries are hurting, resulting in state revenues dropping 19% from Q 1 2008 - Q 1 2009, a reflection of a heavy reliance on personal and corporate income taxes. Voters in January 2010 will decide whether to accept a $733 million tax increase.

Florida

For the first time since WW II, its population is shrinking, complicating a long-term budget strategy based on increases. In 2009, lawmakers raised $2 billion in new revenue, but face a similar shortfall in FY 2010.

New Jersey

For years, it's fiscally mismanaged what it collects and spends. "Growing debt payments and perennially underfunded pension systems will make (its) road to recovery even rougher."

Illinois

As a resident, it's a sore issue for this writer because of bipartisan irresponsible government. Notoriously corrupt politics complicates things at both state and local levels, especially in Chicago.

The result - the FY 2010 shortfall tops $13.2 billion, among the worst in the nation and unsustainable. But it's financial woes began long before the downturn. Most important is its lack of fiscal discipline, showing up in budget deficits every year since 2001. It's solutions - delay paying bills, skimp on state pension payments, borrow when other alternatives run out, and amass billions in deficits with no plan to reduce them.

Wisconsin

It's been hit harder than most states by revenue shortfalls and rising unemployment because it's dependent on manufacturing.

Other states are also in trouble because of four common vulnerabilities:

Center on Budget and Policy Priorities (CBPP) Paints An Even Gloomier Picture

The CBPP conducts research and analysis on numerous vital issues, including state budget and tax policies. Its October 20 report titled, "Recession Continues to Batter State Budgets; State Responses Could Slow Recovery," says the following:

"The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. As a result, even after making very deep cuts, states continue to face large budget gaps," including new ones in over half of them for FY 2010, and others "as big as or bigger than they faced this year in the upcoming 2011 fiscal year."

Besides current shortfalls in 48 of the 50 states, CBPP estimates the combined 2010 and 2011 gaps will be an additional $350 billion at a time of inadequate federal aid that will likely end before state budget crises are resolved. Worse still, tax hikes and spending cuts are undermining recovery when precisely the opposite policies are needed:

Given projected huge new shortfalls and reduced federal aid, even greater tax hikes and budget cuts are coming. They'll likely "trim nearly a full percentage point off GDP that), in turn, could cost the economy 900,000 jobs next year." According to the CBPP:

"The federal assistance that states received for (Medicaid) under this year's economic recovery legislation is scheduled to end with a 'cliff' on December 31, 2010, and (aid they got) for education and other services also will be largely exhausted by then."

Since Q 4 2008, state tax receipts have been declining. In the latest "critical April - June quarter, when a major portion of (their) tax revenues are collected, (they) dropped 16.6 percent in 2009 compared to the previous year."

In the current fiscal year, federal stimulus money made up 30 - 40% of the shortfall. When its reduced or ended, states will have to compensate with new cuts and tax hikes, stressing an already structurally weak economy even more. As a result, expect growing unemployment, lower incomes, fewer benefits, and less consumption, a prescription for long-term economic deterioration at a time militarism and Wall Street bailouts take precedence.

Structurally High Unemployment Impedes Recovery

David Rosenberg produces some of the best economic analysis around. On November 11, he addressed the "serious structural issues undermining the US labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop."

The bottom line - "the level of credit per unit of GDP is going to be much, much lower in the future" than over the past two decades. Expect much higher rates of unemployment because of the following:

As mentioned above, so-called U-6 unemployment is 17.5%. For economist John Williams, it's, in fact, 22.1%, a shockingly high number and rising.

"Think about it," says Rosenberg. When economic recovery begins, what will employers do first? "Well, naturally they will begin to boost the workweek, and just getting back to pre-recession levels would be the" equivalent of adding two million jobs. Overall, business has a "vast pool of resources to draw from before" hiring again. As a result, unemployment will hit new highs "long after the recession is over - perhaps even years," and may stay structurally high like never before experienced.

Economist Jeffrey Sachs on Jobs and the Economy
"The US economy needs structural change that requires a new set of economic tools."

How well is the administration handling the problem? According to economist Jeffrey Sachs in a Financial Times November 10 op-ed, "Obama has lost his way on jobs." Its "stimulus policies are not well-targeted. The Republican alternatives are even worse. Both sides" miss the key point - "the US economy needs structural change that requires a new set of economic tools."

Boosting consumer spending by near-zero interest rates and temporary incentives won't work. "During the previous bubble, (consumers were) encouraged to over-borrow. Recreating a new bubble is like offering one more drink, on the government's account, to overcome a mass hangover. With budget deficits of about 10 per cent of (GDP), government spending needs to be far more consequential than temporary boosts to consumer spending."

Republican strategy is even worse - tax cuts like they always propose for all problems and mostly where they're not needed. Sachs cites critical underfunded areas:

"roads, rail, clean energy, science and technology, diplomacy, international disease control, space, education, job training, water, transport, courts, poverty relief, homeland security, conservation, (and) climate adaptation." His long-term solution is three-fold:

Obama "has lost the economic initiative....Move now, Mr. President, or we will spend our time digging out of the next consumer bust and (end up) buying our technology from China."

Obama "has lost the economic initiative....Move now, Mr. President, or we will spend our time digging out of the next consumer bust and (end up) buying our technology from China."

Insights from the National Federation of Independent Business (NFIB) Optimism Index in Its November Small Business Economic Trends Report

An accompanying press release stated:

"Overall, the small business job machine is still in reverse, due to continued declines in reported sales, rising labor costs, and a need to cut costs. Reported capital spending is at historic low levels, owners are still, on balance, reducing inventory stocks....so orders to wholesale and manufacturing firms for new inventory are weak. Price cutting is rampant (though slowing) which combined with lower real sales continues to produce record reports of earnings declines, one reason capital spending remains low....Events in Washington are not supportive of more optimism about the future - another reason not to spend or hire."

Martin Weiss Warns of "Massive Revolutionary Changes" Ahead

Financial expert and investor safety advocate Martin Weiss explains that the global economic crisis brought the entire financial industry to its knees and caused the largest firms in commercial, investment and consumer banking, brokerage, mortgage lending, and insurance to fail or come close.

"Think about that: The world's largest companies in every single sector of the financial industry. Failed. Bankrupt."

Now we're led to believe:

"Suddenly and miraculously, the same economists who (said the) crisis could never happen are now (saying it's over.) And the same government officials who scoffed at the notion of giant financial failures are claiming they have the (right) solution" to fix everything.

Think again. The derivatives time bomb is still there. So are enormous bad debts on major banks' books. Most important, bad government and Fed policies responsible for the crisis persist and have accelerated. As a result, Wall Street's debt crisis is now Washington's. The crisis that bankrupted giant financial firms is doing it to America and other sovereign states.

"Worst of all," the debt crisis is now a dollar one because the Bernanke Fed "doubled the US monetary base in 112 days. Not in 5,012 days" under his predecessors. It's caused "a massive, revolutionary change in the entire structure of the US economy."

With the new millennium approaching and a potential Y2K bug, the Fed increased the monetary base by $73 billion in three months. After 9/11, it added $40 billion in less than two weeks. Bernanke created over $1 trillion in less than four months. Most important, after the Y2K and 9/11 crises passed, "the Fed promptly reversed its money infusions" (by withdrawing) the extra liquidity. Today, Bernanke has done the opposite by "throw(ing) still more money into the pot," so that in late October "the monetary base surged to new, all-time highs."

"This is the elephant in the room - the situation that everyone knows is there, but no one wants to admit" nor will acknowledge the dire consequences coming from reckless money creation. The federal deficit tripled in one year and keeps rising exponentially, something "totally unprecedented in history."

What's ahead:

As a result, "Don't expect this recovery to last very long. A second recession could come quickly on its heels." Leg one of the downturn may be over, but America's "long-term depression" continues.

Bottom line - today's state fiscal crises promise extended hard times for America, but don't expect media pundits to explain it.


Steve Lendman

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.

Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on RepublicBroadcasting.org Mondays from 11AM to 1PM US Central time for cutting-edge discussions with distinguished guests on world and national topics. All programs are archived for easy listening.

Mr. Lendman's stories are republished in the Baltimore Chronicle with permission of the author.



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This story was published on November 25, 2009.