New
Study Shows Ten States Face Fiscal Crisis: America’s
Downturn
26 November 2009By
Stephen Lendman
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:
-- high foreclosure rates;
-- growing unemployment;
-- budget gaps;
-- legal obstacles to balanced budgets; and
-- poor money-management practices.
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:
-- "marginally attached workers" - those not actively
looking but sought work sometime in the past 12 months
without success;
-- "discouraged workers" who want jobs but gave up
looking; and
-- part timers seeking full-time employment but can't
find it.
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:
-- "unbalanced economies" heavily dependent on
hard-hit industries; for Michigan, autos; Nevada,
gambling; Oregon timber, and so forth;
-- "revenues and expenditures out of alignment"
because of the recession's severity; many of the top
10 have persistent shortfalls; correcting them is key
to their fiscal health;
-- "limited liability to act" because of
constitutional restrictions and mandated spending on
Medicaid and other programs; in California, property
taxes are capped; and
-- "putting off tough decisions," including long-term
fixes to correct fiscal problems; in Illinois,
legislators rejected a $6 billion tax increase forcing
the governor to make cuts; in 2010, 37 governors face
re-election, and 46 states choose their legislators,
so politics will decide upcoming tax and spend issues.
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:
-- 34 states cut higher education aid;
-- 25 reduced it for K-12 schools and other
educational programs;
-- 27 cut healthcare benefits for low-income children
and families;
-- 26 have hiring freezes;
-- 22 lowered state workers' wages; and
-- 13 announced layoffs.
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:
-- for the first time in six or more decades, "private
sector employment is negative on a 10-year basis;
-- eight million jobs have been lost in the past two
years, the most in percentage terms since the 1930s;
11 million full-time jobs were lost, three million of
which shifted to lower-paying part-time ones;
-- a record 9.3 million Americans now work part-time;
in past recessions, around six million was tops;
-- the workweek stands at a record low 33.0 hours;
"the labour input equivalent is another 2.4 million
jobs lost," or 10 million + jobs in total;
"Remarkable;"
-- permanent job losses rose by a record 6.2 million;
"well over half of the total unemployment pool of 15.7
million was generated just in this past recession
alone;"
-- a record 5.6 million people have been unemployed
for six months or longer;
-- "both the median (18.7 weeks) and average (26.9
weeks) duration of unemployment have risen to all-time
highs;"
-- youth unemployment is approaching a record 20%; and
-- the longer unemployed workers can't find jobs, the
harder it will be to retrain then when future demand
picks up.
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
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:
-- "promote greater exports" through a cheap dollar
and "expanded government support for export
financing;"
-- massive education spending and job training,
especially for youths and the less-skilled; and
-- spur investment "in areas of high social return
that are currently blocked by the lack of clear
policies;" one example - conversion to a low-carbon
economy; numerous others as well going unaddressed.
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:
-- massive liquidity created short-term stabilization
and some growth, anemic compared to past recoveries
because of deep structural problems;
-- a global rally in stocks through liquidity
injections, short-covering, and market manipulation;
-- the US dollar decline against "virtually every
major currency on the planet, and will probably
continue to do so;"
-- the decline of paper money overall and parallel
rise in gold; and
-- rising interest rates and a widening yield curve;
the spread between two and 30 year Treasuries reached
359 basis points, six shy of the highest level in many
years; it indicates inflation fears getting bond
buyers to demand higher yields; gold as well is rising
with credible predictions of much higher prices.
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.
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.
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