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States Have Too Much Money?   June 1st, 2011
Don't count that as money in the bank just yet       

 
QUICK OBSERVATIONS

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CNN is reporting that the latest problem states have is (drum roll) too much money. I hope states are smart enough to not go spending their "windfall" just yet...

State budgets have taken a beating since the recession began. But guess what their latest problem is? Too much money.

States are enjoying an unexpected surge in tax revenue, primarily from personal income taxes...

Some officials want to use the extra funds to soften the draconian budget cuts, funneling more money to schools, colleges and social services. But others are standing firm, saying they must curb their spending because the increased tax revenue might not last.


That last sentence is exactly right. Lawmakers must be conservative and resist the urge to increase spending, or even try to "soften the blow" from previous cuts. Because the increased tax revenue will not last.

Why?

Because also reported by CNN, on the very same day, is the following:

Growth in the job market weakened in May, surprising economists and spurring them to call a report on private payrolls "shockingly weak," "grim," and even a "hairball."

"The ADP Employment report coughed up a hairball in May," Robert Dye, senior economist with the PNC Financial Services Group, said in a research note, referring to a report by payroll processing company ADP released Wednesday.


And just yesterday CNN reported that the housing market is continuing to drop and is now in double-dip territory:

Home prices hit another new low in the first quarter, down 5.1% from a year ago to levels not reached since 2002.

It was the third straight quarterly drop for the S&P/Case-Shiller national home price index, which was released Tuesday...

The index covers 80% of the housing market, and this month's report confirmed "a double-dip in home prices across much of the nation," said Blitzer.


And last week CNN reported that GDP growth is decelerating:

U.S. economic growth remained disappointingly weak the first three months of the year, the government reported Thursday.

Gross domestic product, the broadest measure of the nation's economic health, grew at an annual rate of 1.8% in the first quarter, according to the Commerce Department. That is unchanged from the original reading released a month ago, and well below the 3.1% pace of economic growth in the final three months of 2010.


And, also today, an important manufacturing index contracted, prompting a sell-off in stocks:

A stock sell-off gained momentum Wednesday morning after a U.S. manufacturing report showed growth slowing down...

The Institute for Supply Management's manufacturing index for May fell to 53.5, falling short of economists forecast for a 57 reading.


So employment is "shockingly weak," home prices continue to drop and break new lows, U.S. economic growth is "disappointingly weak," and a key manufacturing index is also indicating that the economy is slowing down. The economy is simply in rotten shape and is either heading into a double-dip or is already there. And the problem is that states have too much money?

The "problem" isn't that states have too much money. The real problem is that state legislators might be tempted to spend this temporary influx of tax revenue when they need to be preparing for the next phase of the recession. I'm sure states will have to engage in quite a bit more spending cuts before this thing is over.

Let's hope state legislators across the country resist the urge to spend every last nickle that comes in. States will be needing those nickles in the near future.

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