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Tuesday, July 29, 2008


state government revenue collapses

some might have been expected. california, for example, is at the epicenter of the housing bust and has long been one of the least conservatively managed of all the fiscal states. it is facing disaster with the seizure of the housing market, which has ended not only transfer tax revenues but also killed the booming construction industry. the result, per mish:

Gov. Arnold Schwarzenegger has prepared an order to cut the pay of about 200,000 state workers to the federal minimum wage of $6.55 an hour until a budget is signed.

Administration officials said Schwarzenegger was expected to sign the order, a draft of which was obtained Wednesday by The Times, early next week as part of an effort to avert a cash crisis. The deadline for passing a budget was July 1, and without one soon, the officials said, California may be unable to borrow billions of dollars needed to keep the state solvent.

but other states are in on the act -- states far from suffering california's housing depression. take new york.

In a rare, brief televised address, Gov. David A. Paterson announced on Tuesday afternoon that he would call the Legislature into an emergency session on Aug. 19 to address what he called an economic and budget crisis confronting New York State as a result of plummeting revenues and rising costs.

The new governor avoided any mention of new taxes, instead arguing forcefully for austerity. He said he was calling on the Legislature to reduce the size of the state workforce; cut agency spending; reduce property taxes for homeowners; aid New Yorkers with the soaring costs of home energy; and even consider public-private partnerships that would take over state assets.

“Revenues are dropping dramatically,” the governor added. At the start of May, the state budget office projected a cumulative deficit of $21.5 billion over the next three years. Now, just two months later, that estimate has risen to $26.2 billion — “a staggering 22 percent increase in less than 90 days.”

Mr. Paterson offered another example of the rapid deterioration in the state’s finances. In June 2007, he said, the 16 banks that pay the most on their business profits remitted $173 million to the state treasury. “This June, just a month ago, they sent us $5 million — a 97 percent decrease,” he said.

He vowed, “We will cut spending. Government will learn to do more with less.” He called for help from business and labor leaders and New York’s representatives in Washington to support him.

not commonly understood is the fact that state and local government spending is 11% of gdp -- not quite the 20% of uncle sam, but a considerable chunk. while paul mcculley sets aside concerns of crowding out private financing needs and potential runs on the dollar to advocate levering up (further) the federal balance sheet to overcome the paradox of deleveraging, state and local entities are far less able to finance themselves in this manner.

they instead will be cutting back spending and services, laying off employees and elilminating programs, and generally contributing to the slowdown in the economy. though the federal government can use finance as a countercyclical buffer -- even if that works much better when you're not already in hock for $10tn, and that not counting the GSEs you're backing, which has the institutional risk analyst highlighting the need to raise policy rates 100bps in order to bolster the dollar even though they well understand that over a thousand banks are either stressed or becoming so -- the states are procyclical and look to be helping drive down economic activity from this point forward.

UPDATE: one might further note that the treasury is hammering the market with supply at the same time as the fed is shedding balance sheet quality though their special facilities and selling treasuries through the FOMC to sterilize expanded lending. this is helping to drive interest rates higher. the takeaway: countercyclical federal financing has limits.

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