The Baseline Scenario submits:

By James Kwak

Paul Krugman is generally credited with coining the term “fifty little Hoovers” to refer to our state governments and the current economic crisis. The macroeconomics textbook says that when a recession hits, the government should implement expansionary policy, whether monetary – making cheap money available – or fiscal – borrowing money and spending it to compensate for falling private-sector demand. However, states have no monetary policy, since they don’t control the money supply, and they generally can’t engage in expansionary fiscal policy, because most have made it prohibitively difficult to borrow money and go into deficit. So in a recession, states tend to cut spending and raise taxes, which only compound the effect of a recession. Since most states’ fiscal years end on June 30, some of the effects of this belt-tightening should be hitting right about now.

Complete Story »