Cutting State Aid Will Lead to a Longer and Deeper Recession

Source: Ethan Pollack, Economic Policy Institute, February 9, 2009

The Nelson-Collins amendment to the Senate stimulus bill strips effective stimulus provisions from the bill, such as investments in transportation, broadband, and law enforcement. The most concerning cut, however, is the $40 billion cut to state aid, which represents nearly 40% of the total cuts in the amendment. This cut in particular will reduce the bill’s effectiveness as an economic stimulus, condemn hundreds of thousands to unemployment, and help prolong the recession.

In a recession, tax revenues shrink. For state and local governments–which are required to balance their budgets each year–this means cutting spending, which has the perverse effect of making the recession even worse. In a severe recession, state spending cuts can be so drastic that they significantly threaten the federal government’s ability to staunch the economic bleeding at all.

See also:

A Step Forward, a Stumble Back – Parsing the Economic Stimulus and Recovery Legislation

Source: Center for American Progress, February 9, 2009

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