diet coke for breakfast

Monday, July 28, 2003

Posted by Jake
Red Ink in States Beginning to Hurt Economic Recovery

Having already stripped the nation of a source of economic growth, the budget crises in California and in almost every other state are now beginning to drag down the national economy, prolonging the weak, jobless recovery, the latest budget numbers show.

Over the past two years, the states have gradually cut between $20 billion and $40 billion — no one knows exactly how much — from their spending. Billions more in cutbacks are coming in the fiscal year that started July 1.

Correct if I am wrong here, but I am pretty sure that deficit spending by the government doesn't really help the economy. (Isn't this a Keynesian argument?) Basically the logic of this article is that because the states are being forced to cut workers to manage their deficits it will hurt the economy.

But, I don't know if I buy that. First, if the states had spent within their means they would have never hired so many workers in the first place. Does increasing jobs in inefficient industries really increase growth? Second, the money to pay these people has to come from somewhere. Raising taxes to continue with increased spending is no panacea for growth.

I think this article might be confounding job cuts with reductions in growth. But this is not accurate. We are having a jobless recovery now where growth and productivity are increasing without more jobs. These people have it bass-ackwards.

James --
You're talking long-term economic strength, they're talking short-term. You're right, in the long-term, the State governments will need to use taxes to pay off the debt that they're accumulating right now. It would be in our best interest if they took their medecine and cut spending dramatically. In the short term however, they won't raise taxes and if they stop defecit spending, then jobs will be lost, people will have less money, etc... Keynes largely ignored the effects of interest rates and inflation, but fiscal stimulus (stimulus through govt. spending) quite real. It's just not as powerful as Keynes wanted it to be. I may blog more on this later.


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