Friday, January 22, 2010

Deep Doo Doo

Meanwhile on the economic front, the inevitable collapse is gathering steam. Unemployment insurance programs have run out of funds in 25 states, meaning they've had to resort to borrowing from the federal government to make up the difference. Eight more states are on the verge of joining them.

This brings home a couple of key points. First, there is a growing debt problem at state and local levels which doesn't get much attention. Indeed, because states are borrowing from the Feds to make up for shortfalls, these debts probably show up as a credit which reduces the total reported national debt number.

The second point is that there's no painless solution to the crisis. Cutting unemployment benefits defeats the whole purpose of the programs, and is politically unpopular. Raising taxes on corporations only forces them to fire more employees and increase the number of people requiring unemployment benefits. Raising income or sales taxes reduces the purchasing power of the employed, which will hurt businesses and cause more layoffs. Finally, if states simply default on their debts to the federal government, which is what I think will ultimately happen, then that will just put more pressure on the Federal Reserve to print money to make up the difference. If I'm not mistaken, that's a recipe for high inflation, which simply reduces the monetary wealth of each and every one of us.

1 comment:

Cathy said...

Grim. Very grim. Maybe during his state of the union speech, the President will pull a prosperity rabbit out of his hat.