State & Local Budget Shortfalls to Blunt Effect of ARRA

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May 4, 2009

State & Local Budget Shortfalls to Blunt Effect of ARRA

Impact of federal government action thus far will be limited.

For Immediate Release: May 4, 2009
Contact: Alan Barber 202-293-5380 x115

Washington D.C.- The latest housing and GDP numbers leave little doubt that the nation is now in the grips of the deepest recession in more than half a century. Earlier this year, the President and Congress attempted to address the economic crisis with a stimulus package aimed at giving a much-needed boost to the economy. A new report from CEPR, however, shows that due to budget shortfalls for state and local governments, the full impact of the 2009 ARRA will be significantly less than is generally recognized.

The report, "The State and Local Drag on the Stimulus," shows that the $787 billion included in the 2009 ARRA will not have as much of an immediate effect on the economy as initially anticipated.

"The severity of the downturn has led to budget shortfalls for state and local governments," said Dean Baker, CEPR Co-Director and an author of the report. "Since many states are required by their charters or constitutions to balance their budgets, states will end up using federal stimulus dollars to offset these shortfalls."

The authors of the paper note that after subtracting the annual AMT patch and accounting for state level spending and tax cuts, the full effect of federal stimulus will equal a little more than 1 percent of GDP a year, falling far short of what is needed to re-ignite the economy. Previous CEPR research demonstrates the impact of a worse than anticipated housing crash as well.

"The nation is still contending with the demand shortfall caused by the deflation of an $8 trillion dollar housing bubble and most economic indicators are currently much worse than projected at the time of the passage of the ARRA. This being the case, Congress would do well to consider an additional recovery package to address the depth of the recession,” said Baker.

While the 2009 recovery act was a vital first step towards restoring the nation's economic foundation, this paper puts some perspective on the immediate effects of the stimulus. The full report can be found here.

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