Endless austerity, state and local edition

Brian Nichols of the essential Employ America has a useful, if depressing, roundup of the coming wave of state-local austerity. Some highlights: Ohio, Nevada and Pennsylvania have already announced hiring freezes; Ohio is also looking at a 20 percent across the board cut in state spending, while Virginia has canceled planned raises for teachers. Many cities, including New York, St. Paul and New Orleans, are laying off public employees. And as I noted in my last post, New York  State is planning to slash $400 million from the hospitals at the front line of the crisis.

This isn’t new. One of the many drawbacks of American federalism is that state and local government spending — which includes the great majority of public sevices that people use on a day to day basis — is distinctly procyclical. Following the 2007-008 crisis, austerity at the state and local level more than offset stimulus at the federal level. And it lasted much longer than the recession itself.

In fact, as my colleague Amanda Page-Hoongrajok points out, inflation-adjusted state and local final expenditure did not return to its 2009 level until 2019.¹ On a per-capita basis, real state and local final expenditure is 5 percent lower today than it was at the bottom of the last recession.

Source

As we face the rising wave of public-service cutbacks, we need to be fighting on all levels. We need to demand a massive package of aid to state and local govrnments as part of Stimulus IV. We need to be pushing the Fed to do more to support municipal finances. We need to keep the pressure up on mayors and governors not to throw their hands up and wait for the feds, but to be creative in working around their fiscal constraints.² And also, we need to keep in mind: As far as state and local spending is concerned, the Great Recession never ended.

1. Final expenditure is spending on goods on services — that is spending that contributes to aggregate demand. It does not include transfer payments — but for state and local governments, unlike the federal government, these are a relatively small part of overall spending.
2. Amanda Page-Hoongrajok’s dissertation presents convincing evidence that political alignment played an important role in the path of state spending after 2009, independent of whatever happened to revenues.