There has been a lot of talk lately about a fledgling economic recovery. The Dow has surged past 10,000 while consumer spending and incomes have ticked upwards. Meanwhile, jobless claims have fallen to the lowest level in a year and there are signs of life in the residential sector of the real estate market. These indicators have led some experts to speculate that the economy has turned a corner and has begun a long, slow recovery.

These signs are – without a doubt – positive developments. But don’t be lulled into a false sense of security. A number of fundamental economic problems persist.

One of these is the “the cliff”. Sound ominous? It should.

State finances in Wisconsin and across the country have been buoyed in 2009 and 2010 by a massive infusion of Federal stimulus funds. The stimulus package included $53.6 billion in State Fiscal Stabilization Funds – Federal dollars aimed at propping up ailing state finances. Wisconsin’s share of the State Fiscal Stabilization Fund is approximately $877 million. Increased Medicaid payments to the states have also reduced the need for state spending reductions.

But the federal stimulus is one-time money for 2009 and 2010 only. So what happens in 2011 and beyond? Experts agree that state tax collections will not have fully recovered by 2011. Growth in income and sales tax collections is predicted to be slow, generating insufficient revenues to replace federal stimulus.

Thus the cliff effect – without stimulus dollars, Wisconsin and other states will see significant budget gaps beginning in 2011.  The Center for Budget and Policy Priorities (CBPP) predicts states could face a collective shortfall of $180 billion in 2011. 

So what is to be done?

Noted economist Paul Krugman predicted the need for a second stimulus earlier this summer, writing:

“We’re going to need a bigger stimulus….Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.”

A recent New York Times editorial called for additional recovery spending:

"The economy is going to need more government support, or it is bound to be very weak for a very long time — and vulnerable to a relapse into recession…. Without another round of effective stimulus, the worst recession in modern memory will likely become — at best — the weakest recovery in modern memory. Another boost to federal spending that is targeted and timely should not be too much for politicians to deliver." 

The CBPP is also recommending federal action in the form of extended Medicaid payments to the states and continued assistance for education through additional State Fiscal Stabilization Funds.
 
Contact your Congressional representatives now. Action needs to be taken soon so it can be factored into states’ budget decisions for fiscal year 2011.

Contact your congressional representatives.