Recall them All

California is not the only state with budget trouble, which is apparently now grounds for recall. Based on this story, deficits and spending cuts are widespread. California’s is by far the largest in magnitude, but I don’t know whether it is largest on either a per capita basis or as a percentage of state income.

Here’s the sequence of events: Bush becomes president; a recession hits; Bush lowers taxes once, in a way that makes taxes less progressive; many states had already cut taxes or now follow suit; there is an alleged recovery (the “jobless recovery” in which GDP growth is positive but unemployment growth is negative); Bush lowers taxes again, again moving the tax code towards regressivity; states go into a budget crisis:

The cuts in state spending are just starting to be felt, with the impact landing disproportionately on the poor. “We have been shifting a lot of spending for social services from the feds to the states,” said Robert M. Solow, an economist at the Massachusetts Institute of Technology and a Nobel laureate. “And that means the cuts that are taking place are hurting people at the bottom of the income distribution.”

Moreover, state taxes are generally regressive (fees and consumption taxes make up a large part of states’ revenue). So the net effect of all of this is that the people who will spend any additional dollar they get are (1) getting less dollars, in the form of decreased social services spending (and rising unemployment); (2) about to pay more taxes, due to impending increases in state taxes; and (3) in the process, federal tax cuts reduce the overall tax burden on the well-to-do. As a rough guess, the top 20% are better off, tax-wise; the bottom 25% are worse off. For the middle 55%, cuts in federal taxes are likely to be roughly offset by increases in state and local taxes. Given all of this, there’s not a lot of stimulus in the Bush Tax Cuts, just large deficits. These tax cuts are unlikely to shorten the recession in a Keynesian fashion.


P.S. Just don’t recall the Republican Governor of Alabama.