POLITICS
06/04/2009 05:12 am ET | Updated May 25, 2011

Stimulus Blunted By State Budget Shortfalls: Study

A new report finds that a keystone of the Obama administration's effort to end the recession -- the $787 billion stimulus package -- will be significantly hampered by budget shortfalls in state and local governments, and that another round of stimulus spending might be necessary to counteract the housing crash.

The report (PDF) by the Center for Economic and Policy Research says that state and local budget deficits to the tune of $100 billion a year will offset the stimulative effect of the president's American Recovery and Reinvestment Act. Stimulus dollars used to cover deficits will have no stimulative effect, and the benefit of stimulus money well-spent will be offset if states increase taxes or decrease spending to close budget gaps, the report says.

State budget shortfalls "are bigger than anticipated because the downturn's steeper," said the report's author, Dean Baker, in an interview with the Huffington Post. "The downdraft is greater so the net effect of the stimulus ends up being less."

According to the report, the "net impact of government actions on the economy will be limited and will be a full magnitude of order smaller than the size of the $2.1 trillion demand shortfall created by the collapse of the housing bubble. The falloff in demand could be as much as 15 times the net average annual stimulus implied by ARRA and could leave the U.S. with a net impact as low as 1.1 to 0.7 percent of GDP for 2009 and 2010 respectively."

In March, the Congressional Budget Office estimated that the stimulus bill would increase GDP
"between 1.4 percent and 3.8 percent by the fourth quarter of 2009" and "between 1.1 percent
and 3.4 percent by the fourth quarter of 2010."

Baker said that considering the political difficulty of securing a bigger stimulus package, he doesn't necessarily fault the Obama administration for the size of the ARRA. But he doesn't understand why officials are trying to hearten Americans with talk of economic "green shoots."

"The best thing you can say is the rate of decline is going to slow," Baker said. "If you add up the fall-off of consumption, the fall off of construction in the residential and non residential sectors, that sum is almost ten times as large as the sum coming from the government."

Economists and even businesses have long argued that the stimulus is too small.

"We've been in I-told-you-so territory for a long time," Baker said, adding that the nation will likely take another firm step into ITYST when the Department of Labor releases its unemployment statistics for the month of April.

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