To a large degree, the stimulus was hampered by budget cuts on the state and local level. States have to balance their budgets, and in a recession, this means deep cuts to payrolls and existing services. Economists estimate that if public employment had stayed steady through the recession and into the recovery, the joblessness rate would be at or below 7 percent. As it stands, states are on a cutting spree—state and local spending is at its lowest point since the 1980s—and as USA Today reports, this is exacerbated by receding aid from the federal government:
The tight budget controls represent a sharp reversal from several years ago when states struggled to control spending, despite a drop in tax collections, and got a $250 billion bailout from the federal government. Today, both Republicans and Democrats are rejecting spending requests even from traditional allies — police, businesses, teachers, doctors and others — and keeping budgets balanced as federal aid recedes.
“We’re seeing some incredibly significant examples of groups not getting what they want,” says Scott Pattison, head of the National Association of State Budget Officers. “There doesn’t appear to be that much pushback. Maybe there’s an acceptance that cuts have to occur.”
For all the talk of austerity in federal spending, the most significant source of retrenchment has been at the state and local level. And, as we’ve seen with austerity in Europe, the main effect of this will be to create a downward spiral of slow growth and further budget cuts. In other words, the sluggish economy will lead to low tax revenues and greater spending cuts, which further slows the economy, lowers revenues, and forces more spending cuts.
The obvious solution for this is a second “bailout” for states, but there’s no chance it would pass Congress. Moreover, there’s a fair chance—given the highly ideological Republican majorities elected in 2010—that some states would reject the help. At this point, there’s not much that can be practically done to reverse state/local austerity.