What will the effect be over the next year? We believe it will be around ¾ percentage point, i.e. similar to the last year. This is based on the same reasoning as our July 2009 analysis, and it is illustrated in the third column of the table near the beginning of this comment.
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As explained in yesterday’s daily comment, we no longer expect Congress to extend FMAP. Hence, there is up to $15 billion or so of budgeted funds that may not materialize. This implies required budget cuts in a range of $89bn-$104bn, or 0.6%-0.7% of GDP, almost precisely the same numbers as we found a year ago for fiscal 2010.
So, a .65 increase in state spending yields a .75 increase in GDP, a multiplier of .75/.65 = 1.15; a multiplier greater than one.
Yet multipliers we get from Congressional spending are coming in at .7 and below. John Taylor at Stanford watches these numbers.
How can state spending, with all its corrupt public sector unions, have a higher multiplier than Congress? Because Congress is raising entitlement promises much faster than the government sector can support. So crowding out of state government is happening faster than bankruptcy from public sector unions.
The question then becomes, can technology and automation arrive at state and local government in time to stop the bankruptcies? For schools, web technology will dramatically lower the cost of education for diligent students. This is happening today. In transportation, local governments have a vital role to play. If local governments bite the bullet and deploy congestion pricing and automation, then there is hope.
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