A simple and elegant statement of why balanced budget laws and cutting government spending aren’t necessarily economically responsible, even as they are touted as the height of fiscal responsibility.
Unlike the feds, states have to balance their budgets every year, which means they either raise taxes or cut services. They haven’t done much on the tax side, so they’ve been laying off teachers, cops, maintenance workers; practically every month over the past few years we’ve been adding private sector jobs and shedding public sector jobs.
In a very real sense, what you have here is a microcosm of austerity measures at work in cities and towns across the country. Moreover, this drag on growth is avoidable. One of the most successful parts of the Recovery Act was state fiscal relief, as those dollars went directly to preserving state and local jobs. The American Jobs Act proposed $35 billion to build on that progress, resources that would have prevented hundreds of thousands of ongoing layoffs. But it languishes in the dysfunctional Congress and we’re left with the fiscal drag you see in the figure.