Balancing The Budget

Between California and Illinois, you’re looking at about $45-48 billion dollars to balance budgets, between tax hikes and program cuts. The anti-stimulative effect of that almost totally wipes out the $55-60 billion in stimulative measures that aren’t just extensions of current law in the tax cut deal.

That’s not a commentary on how the tax cut deal could have ended state budget crises (although an innovative policy solution could have at least put that in motion and at least begun to set up some counter-cyclical fund so states don’t have to contract during recessions). It’s more a commentary on how economic forecasters assumed major growth from this tax cut deal, even though it’s almost entirely composed of poor stimulus and would be overwhelmed by budget cuts at the state and probably federal level. Austan Goolsbee likes to talk up the stimulative power of that tax cut deal, but he’s looking at it in a vacuum. Fiscal policy in 2011 and 2012 is still very likely to be contractionary, and nobody in Washington is arguing for that to change. Vain hopes of “stimulus” seem very odd, in this context.