Is the US heading for Recession

State Budgets Facing Crisis
As revenues shrink, lawmakers must cut programs or raise taxes
By Justin Ewers
Posted February 1, 2008

SAN FRANCISCO—When Arnold Schwarzenegger was elected California's governor in 2003, he vowed to solve one big problem. The state's nearly $100 billion budget was a mess. After the tech bubble popped, tax revenues had dropped by 17 percent in one year and the state, required by law to balance its budget, was struggling with an $8 billion deficit. Schwarzenegger went into action, borrowing heavily until the economy and tax revenues picked up, and the ship of state seemed to steady. Last year, he declared victory, along with a "zero deficit."

The good times didn't last—in California, or in many other states that struggled out of the dot-com bust only to watch the housing bubble disappear along with much of their revenue. This winter, with the economy slowing again, Schwarzenegger finds himself mired in a budget crisis even bigger than the first. Shrinking tax revenues and housing deflation are creating a $14.5 billion budget hole to fill. Declaring a fiscal emergency, Schwarzenegger is asking for a 10 percent spending cut in all state agencies. In addition to closing 48 state parks and releasing early as many as 22,000 nonviolent prisoners, he has proposed deep cuts in education, trimming $4 billion from next year's K-12 budget, which would require suspending a law that guarantees a minimum level of school funding. Experts say this is no ideological, small-government crusade. "He's trying to get people's attention," says Daniel Mitchell, a professor of management and public policy at the University of California-Los Angeles. "This is a train wreck, where California is heading."

The Golden State isn't the only one teetering on the brink of budgetary disaster. The economic slowdown has depleted sales and income tax revenues, the lifeblood of state governments, for the first time in four years, causing budget shortfalls in 20 states. According to the National Governors Association, 35 to 40 states could face cuts in 2009. "Most folks did forecast some tempering of the economy; they just weren't conservative enough," says Corina Eckl, director of fiscal affairs at the National Conference of State Legislatures. "They didn't think [revenues] were going to decline as much as they have."

Congress's proposed stimulus package is not expected to present much aid to the states. Which gives state lawmakers three hard choices: Raise taxes, cut spending, or both. Maryland and Michigan opted for both last year, but election season may put an end to the tax hikes. "We're still in an era when tax increases are highly unpopular," says Robert Ward, deputy director of SUNY's Rockefeller Institute of Government. They can also be politically impossible; California and Arizona, for example, require a two-thirds majority in the Legislature to raise taxes.

Heartbreaking. So where to swing the ax? Around two thirds of many general funds are devoted to education, healthcare, and corrections systems. In North Carolina, which so far isn't experiencing a shortfall, those three services make up 93 percent of the state budget. When the state faced a $2 billion shortfall on a $14 billion budget during the last recession, it had to make some heartbreaking choices. "You can cut out the rest of state government and still not be [balanced]," says David Crotts, an economist for the North Carolina General Assembly. "Unless you get into the core areas, it's difficult to cut that much."

A few leaders, like Schwarzenegger, have begun to bite the bullet. New Hampshire's governor has asked for cuts of at least 5.7 percent. In Kentucky, which faces a shortfall of nearly $900 million, state agencies, including colleges, are trimming spending by 3 percent. Experts say tuition hikes and staff cuts will surely follow.

To ease the pain, gambling revenues are being dangled in front of some voters. Measures on the ballot in California this week would allow four Indian tribes to massively expand their casino operations, bringing the state up to $430 million. Kentucky's governor is pushing for a constitutional amendment to legalize gambling, and a ballot measure in Maryland would legalize slot machines. Some 56 percent of likely voters support the measure.

More subtle money-raising schemes are also beginning to appear. Gov. Eliot Spitzer of New York, which is facing a $4.4 billion deficit, proposed $738 million in new "fees" in his budget, including tax increases on malt liquor and small cigars, a new "tax" on illegal drugs ($3.50 per gram of marijuana and $200 per gram of other drugs), and larger closing fees for home purchases over $175,000. "There are creative ways of raising revenue and not calling it a broad tax increase," says Eckl.

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Next step...legalized prostitution?

 

Let's hope so. America has learned the lesson many times over that you can't stop people from doing something by making it illegal. All you do is move it to the black market, where they have no institutionalized protection and no way to resolve disputes. Prostitutes in Nevada, where it's legal (except in the counties that contain Las Vegas and Reno) make good money, work regular hours, have vacations and sick leave, and get trained by medical personnel to minimize the chances of contracting HIV or other STDs. The last time I looked into it there had still not been a case of a Nevada prostitute with HIV.

 

Viva Las Vegas...

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By Joanne Morrison - Analysis (Reuters)

WASHINGTON (Reuters) - The chances of the United States avoiding a recession appear to be growing dimmer by the day, and any contraction in the economy will likely last longer and be more severe than other downturns in the past 20 years.

Recent reports have shown the housing market slump and rising defaults in the mortgage market are now taking their toll on job growth and on the manufacturing and services sector.

But heavy consumer debt, a growing federal budget gap, and rising prices could make any recession worse than Americans have experienced over the past two decades.

"If we do go into recession, it's going to be more severe and long-lasting than the last one," said Jeffrey Frankel, a Harvard professor and member of the private-sector panel that dates U.S. recessions.

The nation's last two recessions, in 1990-1991 and 2001, each lasted for just eight months.

But the two downturns that ended in 1975 and 1982, when economic conditions bore some similarities to today, each lasted 16 months, making them the longest recessions since the Great Depression of the 1930s, according to the National Bureau of Economic Research, the accepted arbiter of U.S. recessions.

The U.S. economy entered the recessions of 1975 and 1982 saddled with huge government budget deficits from spending on social programs and the Vietnam war, and was suffering double-digit consumer price inflation.

 

Trichet Reverses Stance on Rates, Sees Growth Risks

By Simone Meier and Gabi Thesing

Feb. 7 (Bloomberg) -- European Central Bank President Jean- Claude Trichet reversed course and signaled he's open to cutting interest rates for the first time in five years as economic growth falters.

Trichet dropped a threat to raise rates after economic reports in the past week showed Europe being infected by the slowdown in the U.S. economy. The region's service industries grew at the slowest pace in more than four years in January, and consumer and executive confidence fell to a two-year low.

``Uncertainty about the prospects for economic growth is unusually high,'' Trichet said in Frankfurt today after the ECB kept its benchmark interest rate at 4 percent. The Bank of England reduced its key rate by a quarter point to 5.25 percent today.

The comments are a ``capitulation'' after Trichet said last month that growth in emerging markets such as China and India would cushion the effect of a U.S. slowdown, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc.

The ECB president said the bank's 21-member council no longer considered increasing rates, as it did last month, and that the degree to which emerging markets can offset the U.S. was ``an open question.'' The euro fell and bonds rose following his remarks.

The ECB has kept borrowing costs at a six-year high since June to contain inflation. By contrast, the U.S. Federal Reserve last month lowered its key rate by 1.25 percentage points to 3 percent, the fastest pace of cuts since 1990.

Investors Predict Cuts

The ECB's shift paves ``the way for a possible rate cut in the future, should the economic situation continue to deteriorate,'' said Sandra Petcov, an economist at Lehman Brothers International in London.

BNP Paribas SA and Royal Bank of Scotland brought forward their forecast for a rate cut to April and Rabobank Groep NV now predicts the bank will lower lending rates twice this year instead of keeping them unchanged.

Investors are raising bets the ECB will have to pare its benchmark at least twice this year, according to futures trading. The yield on interest-rate contracts maturing in December fell as much as 18 basis points to 3.34 percent today, 66 basis points below the ECB's benchmark rate. It was as high as 4.36 percent on Dec. 27, and has averaged 31 basis points more than the central bank's key rate for the past five years.

The euro weakened to $1.4496 from $1.4632 yesterday and the yield on 10-year German bunds fell as much as 5 basis points to 3.85 percent.

Slower Growth

The International Monetary Fund on Jan. 29 lowered its 2008 euro-region growth estimate by half a point to 1.6 percent, saying that ``no one is going to be exempt from some slowdown.'' The Washington-based fund also trimmed its growth estimates for the U.S. and Japan, the world's two largest economies.

The ECB on Dec. 6 projected economic growth of about 2 percent this year after 2.6 percent in 2007. Trichet said today the latest data confirmed the bank's assessment that ``risks surrounding the economic outlook lie on the downside.''

Stock markets have dropped this year on concern the U.S. economy is sliding into a recession after the collapse of subprime mortgages, aimed at borrowers with poor credit histories. The slump pushed up credit costs worldwide as banks became reluctant to lend to each other. Germany's benchmark DAX Index has lost 16 percent and the Dow Jones Stoxx 600 Index 12 percent.

UBS AG, Europe's largest bank by assets, last month reported $14 billion of subprime-related charges, bringing the total for the world's largest financial institutions to more than $145 billion. Josef Ackermann, chief executive officer of Deutsche Bank AG, said today 2008 will ``remain challenging.''

BOE Cut

The Bank of England's cut today was the second in three months and took its benchmark to 5.25 percent, still the highest among the Group of Seven industrialized nations. That was still more cautious than the Fed, which has pared rates five times since September.

U.K. policy makers said in a statement today they need to balance the risks to economic growth against the threat that inflation may become entrenched above the 2 percent target.

Trichet said today he remained concerned about a potential wage-price spiral as workers demand compensation for higher prices. Inflation in the 15 euro countries accelerated to 3.2 percent in January. The ECB predicted in December that price gains will average about 2.5 percent this year after 2.1 percent in 2007. It would be the ninth year the ECB fails to achieve its goal of keeping inflation just below 2 percent.

``If I was Jean-Claude Trichet, I wouldn't cut interest rates,'' Deutsche Bank's Ackermann said in an interview. ``The ECB should keep its course and not follow the Fed.''

``The ECB sounds more worried by downside risks to growth than in previous months,'' said Dario Perkins, an economist at ABN Amro Holding NV in London. ``This suggests the tightening bias has gone. But don't assume this means interest-rate cuts are coming soon. The ECB is still constrained by inflation.''

To contact the reporters on this story: Gabi Thesing in Frankfurt gthesing@bloomberg.net ; Simone Meier in Frankfurt at smeier@bloomberg.net .

 

MSG? That is funny...

 

Slow death for the elephant then....

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In Africa, they cut the large blood vessel of the elephant for it to bleed to death....