Federal stimulus money is now the number one income source for state and local governments, the latest statistics show.

Contradicting the Republican anti-stimulus rhetoric, the new data shows that the infusion of federal money — under the American Recovery and Reinvestment Act (ARRA) signed by President Obama in February — has prevented some state and local cuts and even made possible some hiring that would otherwise not have happened.

The stimulus aid now tops sales and property taxes as a state and local revenue source. States and communities have been reeling under a sharp drop in those tax revenues due to the economic crisis. But the federal money has enabled state and local governments to increase their spending by nearly 5 percent in the second quarter of this year, after six months of decline.

Progressive economists underscore that the federal stimulus has “helped quite a bit,” as economist Dean Baker puts it, in lessening some of the economic pain on a state and local level. At the same time, they emphasize, much more federal action is needed.

“This recession has been so severe — and state revenue collections have fallen so much — that states are facing extremely large budget gaps,” writes Robert Greenstein, executive director of the Center on Budget and Policy Priorities. Most states have slashed programs and raised taxes, he notes. “But without the stimulus, it would have been worse.”

“The stimulus is providing states with roughly $140 billion in fiscal relief over the next two years (primarily for health care and education),” Greenstein writes. “These funds are having a decided impact.”

“Virginia, for instance, has reversed plans to end funding for hundreds of sheriffs’ deputies, thousands of school personnel, and three mental health facilities. New York reversed a big proposed cut to senior citizens’ prescription drug benefits and another big cut to school funding. Of 16 states that the Government Accountability Office studied, at least eight found that stimulus funds helped school districts keep teachers on the payroll.”

In the past three months, state and local governments added 12,000 workers, a 0.1% increase, according to the Bureau of Labor Statistics. The private sector cut 1.3 million jobs, a 1.2% reduction, in the same period.

Baker, co-director of the Center for Economic and Policy Research, notes, “In the prior two quarters, state and local government spending had been contracting, as state and local governments were forced to make cuts in response to budget deficits. The stimulus package allowed them to sustain existing programs and even expand them in some areas.”

Economist Josh Bivens of the Economic Policy Institute writes, “State and local government spending grew at a 2.4% annual rate, the fastest growth since the middle of 2007. It is clear that the large amount of state aid contained in the ARRA made this growth possible.”

But these economists warn that more, not less, federal funds are needed.

“The stimulus was not large enough to fully stem off a massive round of budget cuts by state and local governments across the country,” Baker notes.

“To say that the stimulus has made things better is not to say that it has made things good,” he writes. “We are looking at an unemployment rate that is virtually certain to cross 10 percent in the next few months and likely to remain above 10 percent into 2011, and possibly longer, without a further boost to the economy.”

“In short,” says Bivens, “the recovery act turned this quarter’s economic performance from disastrous to merely bad. This is no small achievement, but with even more public relief and investments, the U.S. economy could do much better.”

suewebb @ pww.org


Susan Webb
Susan Webb

Susan Webb is a retired co-editor of People's World. She has written on a range of topics both international - the Iraq war, World Social Forums in Brazil and India, the Israel-Palestinian conflict and controversy over the U.S. role in Okinawa - and domestic - including the meaning of socialism for Americans, attacks on Planned Parenthood, the U.S. as top weapons merchant, and more.