Politics on the Hudson

   The federal American Recovery and Reinvestment Act passed in February provided $106 billion in aid to states, about 25 percent of the $437 billion total state and local budget shortfalls, a report from the Washington-based Economic Policy Institute says.

   Since state and local governments cannot run a deficit, as the federal government can, they have to make up the other $331 billion in spending cuts and tax increases. Those actions depress consumer demand, cause job losses (mostly in the private sector) and create  a “drag on the economy,” the report said. 

   States have drawn down their rainy day funds and face a $357 billion total budget shortfall for the 2010 and 2011 fiscal years. Local governments are dealing with an $80 billion shortfall, the group found.

   New York faces a mid-year budget deficit of $3.2 billion, and lawmakers are in Albany this week trying to figure out how to remedy that. Gov. David Paterson has said he is against using the state’s $1.2 billion rainy day fund. Lawmakers and the governor have agreed they don’t want to increase any taxes or fees.

   The Economic Policy Institute said spending cuts would be harmful to the economy, in part because they hit low-income individuals disproportionately. Those individuals cut their spending, which results in lower sales for businesses, which then cut wages or lay off workers. Each dollar of spending reduction by state and local governments leads to $1.41 in lost economic activity, the group said.

   According to the institute, current and future budget shortfalls will lead to millions of job losses and likely contribute to a drawn-out and painful recovery.