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Hey Buddy. Can You Spare a Buck?
Finance
Perspective on the News
Monday, June 07, 2010
Ed DeShields

Treasury Secretary Geithner made the world circuit this week to the G20 countries.  His message?  Start spending; the U.S. economy requires it.  Geithner’s approach is akin to the man in the Cadillac asking the panhandler if he could spare a buck.  It isn’t going to happen.

The United States wants countries with trade surpluses, like Germany and China, to stimulate domestic demand, fearing that budget slashing will slow growth and endanger an economic recovery.  Unfortunately, most countries are questioning the logic of increased spending and preferring to slash spending.

Mr. Geithner’s pitch is clearly trying to head off the debt crisis at home.  But, at least 46 states now face shortfalls for the upcoming fiscal year. These come on top of the large shortfalls that 48 states faced in their current budgets.  States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs.

According to the Center on Budget and Policy Priorities, states still face:

  • Large gaps for 2011 and beyond. States’ fiscal problems will continue into the next fiscal year and likely beyond. Fiscal year 2011 gaps — both those still open and those already addressed — total $112 billion or 17 percent of budgets in 46 states. This total is likely to grow as revenues continue to deteriorate, and may well exceed $180 billion. States will also face large gaps that could total $120 billion the following year (FY2012).
  • Gaps in 2010 budgets. These new shortfalls are in addition to the gaps states closed in their fiscal year 2010 budgets. Counting both initial and mid-year shortfalls, 48 states have addressed or still face such shortfalls in their budgets for fiscal year 2010.
  • Declining federal assistance. Federal aid to states provided in the American Recovery and Reinvestment Act has lessened state cuts in services and tax increases. But the aid is now mostly gone; only about $40 billion remains to help with 2011 fiscal problems. The federal government could avert deep additional budget cuts that would further harm the economy by extending assistance over the period during which state fiscal distress is expected to continue rather than cutting it off before states have recovered.
  • Combined gaps of $260 billion for 2011 and 2012. These numbers suggest that when all is said and done, states will have to deal with total budget shortfalls of some $260 billion for 2011 and 2012.

When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.

How about this bombshell.  Based on a report from the Consumer Metrics Institute this week, the U.S. is likely to return to recession in the 3rd quarter of this year to a minus 2% growth in the GDP.   That’s negative 2%.  The Consumer Metrics Institute tracks consumer discretionary spending on a daily basis and has been very accurate in predicting economic performance in the past.  

This means that the unemployment number is going to remain stubbornly high through the next decade. Let's assume a modest recovery of 3%, (not the predicted minus 2%).  A 3% growth rate would be enough to get monthly job growth back to the 150,000 range. As people go back to work, about 0.5% of discouraged workers start to look for jobs and they are now counted as unemployed. That small number of 0.5% is 750,000 people that will be (should be) added back into the unemployment numbers!    Since we lost 8 million jobs in the last two years, it will take a decade or two to return to 2007 job levels.

It takes 100,000 new jobs a month just to keep up with population growth. (Studies are all over the place on this. 100,000 is the low estimate and 150,000 is the high.).   That means we need 1.2 million new jobs next year just to keep the unemployment rate at 10%. And another 750,000 jobs to go to the discouraged workers who will want to start looking. Close to 2 million jobs will be needed to keep the unemployment rate from rising.

And the current business climate says that is not going to happen.

About Ed DeShields

Last Week: Birth of New Nations



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