The economy is beginning to show the effects of the public sector cut backs. It does not take a Harvard PHD to understand that when states and municipalities cut back the amount of money they spend it will slow down economic activity. Every talking head on TV who is surprised at a possible second leg to the recession has just not been paying attention to fiscal policy. In addition the reluctance on part of Congress to stimulate the economy will add to the downturn. This is a deliberate policy choice and there are people who believe reining in government spending is the most important priority for the US.
One of the benefits of a recession is it will highlight problem areas in the economy. The country has the opportunity to take corrective action to set our long term house in order. States are mandated to produce a balanced budget and many have responded by cutting spending, decreasing employment and employee costs, redoing benefits for future hires and upping user fees. The part of the budget which lends itself to abuse is estimating future tax receipts. This area has shown weakness in recent weeks. Tax collections are below what states have anticipated because the economy is slow and this is leading to revenue shortfalls in the current fiscal year. The bright spot is that tax collections are ahead of 2010 but not at the level predicted for 2011. Clearly the estimates are off base but they provide a cheap political fix to pretend the budget will be balanced. The exposure of these gimmicks is a benefit of an economic slowdown. We need clear, realistic and frank discourse concerning public finance and government spending and because there is no place to hide we are finally getting it.
RANDOM COMMENT: The trouble with Washington is personified by Eric Cantor. Eric was scheduled to make a speech at the Wharton school but cancelled because there might be Occupy Wall Street protesters present. Instead of presenting his ideas to people who might disagree; Eric skipped the speech and posted his speech on line. This is not leadership it is cowardice.