State & Local Budget Shortfalls to Blunt Effect of ARRA

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 acounting 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.