As many have noted, the federal stimulus’ effects have been increasingly mitigated by plummeting revenues and spending for state-level and local governments. That is to say, federal government spending has gone up, but negative state spending has essentially cancelled out the effects. An unwillingess to bail out the states has led to cuts at the local level that are bad in the short-term and worse in the long-term.
I have seen this at ground level, as teacher layoffs in Chicago reach a fever pitch. With the possibility of 18% budget cuts (this seems increasingly unlikely, but the specter hangs over the whole of Illinois’ education system), the loss of jobs at the school level cancels out any number of stimulus-generated jobs in education, most of which are focused on school construction or repairs.
And yet, the new stimulus bill being debated in the House is cutting state aid, which only serves to make the stimulus less effective. Unlike the federal government, state governments have no ability to deficit spend, and are generally speaking more beholden to special interests that restrict their ability to raise taxes or cut spending programs. In the end, most states opt for massive cuts to programs for poor people (education, Medicaid, subsidized housing, etc.).
This cycle will only continue as the economy appears to recover. The underlying conditions for high unemployment will remain for some time, and the long-term dangers of a reduced social safety net will make those conditions even worse. In the end, the cuts in state funding will not even work temporarily. For instance, Chicago Public Schools have opted for mass layoffs, class size increases, furlough days, etc., while still continuing the union-mandated 4% raise to stave off the possibility of a teacher strike.
The state and city will still be in the red, while setting themselves to go even deeper into debt.