States Grow Anxious About Possible Downturn

By: - August 16, 2011 12:00 am

Just as states begin seeing signs of recovery from the last economic downturn, now there is talk of another one.

The possibility of a double-dip recession is worrying state officials who thought they had put the worst downturn since World War II behind them.

State officials say the bleak economic news of the past few weeks has triggered new alarm just as jobs are slowly increasing and tax collections are improving. Some economists have said that last week’s stock market swings, reports of slow growth and the downgrading of U.S. debt by Standard & Poor’s could be early indicators of the first dual recession since the early 1980s.

“I look at the gyrations in the stock market and wonder if it’s not a sign of an economy substantially out of balance,” says New Hampshire House Speaker William L. O’Brien, a Republican.

Lawrence Yun, chief economist at the National Association of Realtors , told a meeting of the National Conference of State Legislatures last week that he has increased the probability of another recession from 10 percent three months ago to 30 percent today. A recent USA Today survey of 39 economists reached the same conclusion. A reason for the pessimistic forecast, Yun said, is “all the weapons to fight the economic downturn have already been used.”

Back-to-back recessions would be crippling. Already, states have slashed nearly half a trillion dollars in the past five years to balance their budgets — cuts that blunted the effect of the $787 billion economic stimulus Congress enacted in 2009 to help revive the economy. Drops in state tax collections from another recession could lead to additional cuts in services, programs and employees at the same time the federal government is poised to begin reducing aid to states thanks to the recent debt-ceiling agreement.

As Debbie Smith, a Nevada Democrat who chairs the state Assembly’s Ways and Means committee, puts it, “We don’t know what’s left to cut.”

Economic signs of life

Another recession on the heels of the one that ended in June of 2009 would negate the slight progress many states have been making with their finances. Delaware Controller General Russell T. Larson says improving tax revenues in his state allowed lawmakers to pass a budget that covers the falloff of federal stimulus money and even gives 2 percent raises to state employees and pensioners.

“We’re just now starting to get back on our feet,” Larson says. “If the economy sinks again, we’re stuck in the same boat.” As evidence of economic gains that Delaware would hate to lose, Larson notes that Fisker Automotive recently said it would buy a closed General Motors plant near Wilmington to build hybrid-electric cars.

Until the 2007-09 recession, the previous worst for states was the double-dip downturns of 1980 and 1981-82. State economies take longer than the national economy to bounce back from a downturn. That’s because the decline in tax collections and the increase in spending on safety-net programs such as Medicaid do not occur until late in the recession and sometimes continue into the recovery. Two years after the official end of the latest recession, many states still are not bringing in the amount of money they had before 2007. Meantime, Medicaid enrollment is skyrocketing.

“I don’t think it has yet sunk in with the public how difficult it is for state and local governments and how complicated it is going to be,” says William Purcell, a former Tennessee legislator and Nashville mayor who now directs Harvard’s Institute of Politics.

Some state lawmakers blame President Obama for failing to offer a coherent policy to stimulate economic growth. “Our president has to provide more leadership,” says Republican state Senator Paul Campbell of South Carolina. Campbell’s state this year raised unemployment insurance taxes on employers , which he says will discourage job creation.

According to Yun, the Realtors’ economist, when the consumer confidence index is 100 or above, the incumbent president usually is reelected. The current level is hovering around 55. “If the election was held today,” Yun says, “President Obama would be in trouble.”

A future of spending cuts

One of the Republicans seeking Obama’s job, Texas Governor Rick Perry, told the meeting of state legislators last week that the recent political breakdown over raising the debt ceiling “was the culmination of a reckless culture that has refused to confront spending in Washington, D.C.” Texas’ relatively healthy economy, he said, proves “you can’t tax and spend your way to prosperity.”

No sooner had Perry finished speaking than state Representative Paul Haire, a Democrat from North Carolina, reacted in disgust. “This idea of cut, cut, cut can get out of control,” Haire told a reporter. “Cutting spending also cuts jobs, which stimulate the economy. You can’t improve the economy unless people have money to spend.”

The prospect of additional spending cuts from another recession also worries Democratic Senator Steve Conway, who represents a high-unemployment district south of Tacoma, Washington, where one of three residents are on Medicaid and one in five get food stamps. “The more we cut,” Conway says, “the more we cut into people’s ability to survive.”

Lawmakers in both parties agree on one thing: The key to reviving the economies of their states is creating jobs and boosting the housing market. Both will dominate 2012 legislative sessions and the election campaign. As Joseph Cryan, a Democrat who is the majority leader in the New Jersey state Senate, puts it, “I don’t know how we ever get better until we get people back to work.”

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.