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Published: September 27, 2010
Even as the national economy manages to stay above water,
the local picture is more complex. A number of states are
starting to bounce back while other local economies remain under
duress. Compared to a year ago, the employment picture has
gotten even worse in 26 states, while conditions have stayed the
same or improved in the other states. For many distressed states
and cities, conditions may soon improve, while in other areas,
conditions may worsen yet further.
To get a sense of the relative levels of distress, we can look
at recently-released state unemployment rates.
|
State |
August 2009
Unemployment Rate |
Year-to-Year
Change |
|
Nevada |
14.3% |
+1.8% |
|
Michigan |
13.1% |
-1.2% |
|
California |
12.4% |
+0.4% |
|
Rhode Island |
11.8% |
+0.1% |
|
Florida |
11.7% |
+0.7% |
|
South Carolina |
11.0% |
-1.1% |
|
Oregon |
10.6% |
-0.6% |
|
Indiana |
10.2% |
-0.1% |
|
Illinois |
10.1% |
-0.5% |
|
Ohio |
10.1% |
-0.6% |
|
Georgia |
10.0% |
+0.0% |
|
Mississippi |
10.0% |
+0.2% |
|
Source: Labor Department |
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These 12 states have double-digit unemployment rates, and only
Michigan and South Carolina have made any real progress.
Michigan has been very aggressive in attracting new industries
such as advanced batteries, and is also benefiting from a modest
rebound in auto production. Many of those new jobs have not yet
come online as factories are only being built, but Michigan
could benefit from a virtuous cycle where each new job creates
ancillary employment in businesses that service employees of
those new factories.
Four out of 10 states with the highest unemployment rates reside
in our nation's Rust Belt (Michigan, Indiana, Illinois and
Ohio). And the only real panacea for these states is a rebound
in the industrial sector. Yet that's not likely to take place
unless the United States can materially boost exports. And much
of that is dependent on a weaker dollar, which would also boost
domestic consumption as imports become relatively more
expensive.
Yet in places like Nevada and Florida, no clear panacea exists.
Nevada's building boom was so extensive that it will take a very
long time for economic activity to rebound. Las Vegas, the heart
of the Nevada economy, will never again see the day when it only
had to worry about Atlantic City for a gambler's dollars.
Casinos have been built in so many states that the industry is
over-saturated.
California's 12.4% unemployment is especially vexing, as that
state's economy is as large as that of many European countries.
The cost of doing business in California remains quite high, so
companies looking to build a new factory or headquarters are
likely to look elsewhere.
Crippling debt
States' ability to rebound is also tied to their fiscal picture.
States running large budget deficits face no choice but to lay
off many public employees, especially as support from Washington
will wind down next year. And in state capitals where public
sector employment dominates the landscape, many other businesses
will need to pare payroll as they'll have fewer customers.
The Center on Budget and Policy Priorities (CBPP) notes that
states ran a cumulative
deficit of $129 billion in fiscal (June) 2010, and that
figure is expected to rise to $144 billion in the
fiscal year that began July 1st. Fiscal 2010 deficits would
have totaled $192 billion were it not for the federal support.
December 31st looms large for many states. That's when
federal funds that have been earmarked for state-level
Medicaid support will end. Some expect Washington to provide an
extension in support of Medicaid, but that's no sure thing. And
continued federal support for local state budgets looks even
less likely beyond the current fiscal year.
States are hoping that an economic rebound will boost tax
receipts, but the shortfalls are so large that further
belt-tightening will be impossible to avoid. And as the CBPP
notes, "budget cuts often are more severe later in a state
fiscal crisis, after largely depleted reserves are no longer an
option for closing deficits."
On average, a typical state currently has a 17% budget gap for
fiscal 2011 that will need to be closed. A few states have
budgets that are in balance, but many states have alarmingly
high budget gaps. This table looks at the relative budget
deficits of states with the highest unemployment rates. (If
Washington does pass another stimulus program, then these
shortfalls would be reduced.)
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It's worth noting that three of the Rust Belt states have
already enacted very tough budgets and will need to tighten
their belts much further. But in many states, further cuts in
public employment appear inevitable.
Implications
How and when individual states can get back on their feet is
highly dependent on regional factors. Florida's slump is largely
due to a massive housing collapse. Yet Florida real estate
prices have fallen so far that as the economy rebounds
elsewhere, baby boomers may again be emboldened to buy a home in
the sunshine state. That would provide a badly-needed boost to
the state government's coffers. Southern states such as Georgia,
Mississippi and South Carolina still have fairly low costs of
living, which is why many European and Asian companies choose
this region when looking to build new U.S. factories.
Other states will be forced to adapt to a changing world in
order to lure businesses. New York State, which has among the
highest taxes in the country, is nevertheless making real
headway in attracting new clean energy and semiconductor
businesses (most notably in the Albany, NY area and NY's Hudson
Valley).
But there is no quick fix. And things will get worse before they
get better. The real hope is that private sector employment can
expand at a faster pace than public sector employment shrinks.
And that's no sure thing. State employment data are released
around the 20th of every month. Keep any eye on these figures
during the next few months. Any worsening of the data could
portend a major crisis in some of these states, requiring an
emergency intervention from Washington, as California needed in
2009.
-- David Sterman
Staff Writer
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