Note to Center for American Progress: It's the Economy, Stupid


Posted by Kelly William Cobb on Tuesday, June 28th, 2011, 3:50 PM PERMALINK

The Center for American Progress (CAP) is touting a myopic economic analysis claiming that a 10 percent cut in state spending actually leads to a 1.6 percent decline in private sector jobs. They even have fun scatterplots. But what CAP conveniently ignores for political gain is that correlation is not causation.

In fact, the reverse of their argument is true: diminishing economic growth, rising unemployment, and reduced consumption all cause state tax revenues to decline, and spending to drop with it. In short: it’s the economy, stupid.

Unlike our federal government that spent itself into debt, every state except Vermont has a balanced budget amendment tying expenditures to revenues. Tax revenues plummeted in the last recession – well beyond prior ones – forcing states to take at least some austerity measures to maintain balanced budgets.

The reason spending cuts became the major focus was because states were on a spending joyride in the run-up to the recession, pushing expenditures well beyond what their economies could handle. In 2007, when the recession first set in, annual state spending growth had hit 4.3 percent, while GDP growth was half that at 2.1 percent.  In a glaring sign of fiscal irresponsibility, even when the recession became evident during 2008 and GDP growth had tumbled to 0.4 percent, states ramped up year-over-year spending by another 4.2 percent.  Meanwhile, the real employment level had started declining in 2006, and by the time states started merely slowing the rate of spending growth in 2008, job losses were already a problem.

States adjust budgets and cut spending after economic realities set in, as the data and graph above show.  Spending cuts followed massive drops in economic growth and employment; meaning unemployment was high before and occurred regardless of spending cuts.

Finally, I take issue with the fact that CAP excludes federal transfers to states in their calculation, making the supposed draconian cuts appear more severe than they actually were.  In fact, most of the cuts didn’t exist at all.  State budgets are traditionally based off prior projected increases in revenue and spending, so reductions aren't actually year-over-year, but rather a cut from what lawmakers anticipated or wanted to spend.  While some states did trim their budgets, total state spending actually increased nationwide by 8.4 percent between 2007 and 2010 (even adjusted for inflation).  Much of this increase was the result of the federal “stimulus” that allowed states to avoid cutting actual year-to-year spending, keeping their spending baselines on the rise.

Bigger spending cuts do not create weaker economies or higher unemployment, as CAP argues.  Rather, weaker economies and high unemployment can’t sustain the tax revenue necessary for big government spending.

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