- 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,
- "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
- 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
- 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.
- 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
- -- "marginally attached workers" - those not
actively looking but sought work sometime in the past 12 months without
- -- "discouraged workers" who want jobs but
gave up looking; and
- -- part timers seeking full-time employment but can't
- 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.
- 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
- 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
- Gambling and sales taxes provide 60% of its revenue.
The economic crisis hampers both.
- 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.
- 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."
- 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.
- 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
- -- "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
- 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
- -- 27 cut healthcare benefits for low-income children
- -- 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
- 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
- -- 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
- -- 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
- "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
- 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
- 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"
- 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
- "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
- -- 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"
- 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
firstname.lastname@example.org. Also visit his blog site at sjlendman.blogspot.com.