State Government Spending Cuts Could Lead to Higher Unemployment

As state governments face budget gaps of tens of billions of dollars in FY 2009 and FY 2010, the Center for Economic and Policy Research
(CEPR) today released an issue brief that calculates the potential
detrimental effects of state budget cuts on unemployment in the states.

The issue brief, "The Effect of Budget Belt-Tightening on Employment,"
demonstrates that in a worst case scenario - in which state
governments address their budget shortfalls with only spending cuts -
budget belt-tightening would lead to losses of over 350,000 jobs in FY
2009 and almost 900,000 jobs in FY 2010. The brief includes job loss
estimates for every state that has reported a budget gap.

"Spending
cuts have the effect of restricting demand and increasing unemployment.
During a recession, when the economy is already shrinking, these
'pro-cyclical' measures can make things worse," said Matthew Sherman,
Research Assistant at the Center for Economic and Policy Research and
author of the brief.

As
state and local governments are forbidden by law or tradition to run
budget deficits, they are limited in the methods they can use to remedy
their budget gaps. As Congress considers a national economic recovery
package, this issue brief highlights the fact that aid to state and
local governments could help avoid spending cuts and ensuing job losses.