Booming into the Bust

By Fester:

Local and state governments are pro-cyclical agents.  When times and tax revenues are good, local governments increase spending and employment levels which can contribute to the boom as high return on investment public goods can be provided.  However when times are tight and tax revenues are stagnant or falling, the balanced budget requirements of almost all state and local governments means they must cut back.  This worsens the bust as employment decreases and the spin-off jobs also disappear. 

Until the end of this fiscal year, which is next week for most local governments, tax revenues have held close enough to projections that one off fixes and minor cuts could cushion the employment blow.  However as the next fiscal year is starting next week and local and state budgets are assuming significantly lower property, and sales tax streams, government spending and government employment looks to decrease, as CNN is reporting a wave of new layoffs:

With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. Many expect more job cuts ahead as public officials struggle to balance their budgets.

The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year.

This is probably a low estimate of local government layoffs and definately a low estimate of local government job losses as it is almost certain that governing bodies will engage in attrition and hiring freeze strategies to reduce costs.  Furthermore, local governmental bodies and public service providers are not particularly well hedged or protected from rising costs.  For instance the Pittsburgh Port Authority, which runs the regional mass transit system, is in trouble as its hedge against fuel prices will soon expire:

The authority has budgeted $4.15 a gallon for diesel fuel, or $34 million total, almost twice as much as the current year, when it locked in a price of $2.28 a gallon in a long-term contract.

These are needed services that provide high value to individuals and the community as a whole.  However the pro-cyclical nature of local government financing means the money won't be there to fund net positive expenditures.  This is one of the reasons why a reasonable and economically defensible stimulas package should have contained some form of state and local government aid.  The federal government can borrow and it can save/reduce its debt so it can smooth out service flows when state and local governments can not.  But given the Congress and the President we have, we can only anticipate a pro-cyclical slowdown of state and local spending.