Wackonomics
Today's New York Times asserts that reduced spending by the states is hurting the economy. That assertion is just bizarre and as it turns out, the only person in the story making the claim is not an economist but the director of a portion of a left-leaning think tank in Washington DC that favors bigger budgets and higher taxes at the state level.

The Times says:

Just three years ago, the states were still a plus for the economy. While the private sector had begun to limp, state spending had remained strong and so had revenues, despite cuts in tax rates in several states. Today the opposite is happening, and that makes the states a net minus for the national economy. Without that reversal, some economists say, the economy would probably be growing at an annual rate of more than 3 percent, enough to create jobs rather than eliminate them.

But the Times fails to name a single economist who believes that.

It does quote Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities in Washington, who says, "It is reasonable to think that the response by the states to the fiscal crisis is taking at least half a percentage point out of the growth rate of the national economy." But Johnson - who is a journalist by training, according to the CBPP's staff listing, not an economist - offers no explanation of why such a thought is "reasonable." Nor does the Times.

Perhaps that's because the notion that reduced state spending is harming the economy is not reasonable at all - it's just crazy. Think about it. Reduced state isn't causing the economic slowdown - it's being caused by it, as the slower economy generates less tax revenue for states to spend. States get money to spend by taking it out of the economy. Increased state spending merely means more money has first been taken out of the economy and filtered through an inefficient bureaucracy before flowing back into the economy. Most states are required to balance their budgets, so increasing state spending now would require tax increases - taking more money out of the economy.

The CBPP, The Times' only source for the dubious belief that that reduced state budgets is harming the ecomy, recently proposed states raise income taxes in order to balance their budgets, calling income taxes "a particularly promising source of new revenues because it can yield a significant amount of new revenues to help plug the large budget gaps."

The story is also laced with an untruth. The Times claims "Because state tax collections are indirectly linked to those at the federal level, the Bush administration's tax cuts have fed through to the states as parallel cuts. But the hardest-hit states, California and Minnesota among them, have been those with progressive income taxes, charging upper income households at considerably higher rates than those at the low end. As incomes have fallen, tax collections have fallen faster in these states than in those without progressive tax rates." The data show otherwise revenue from state income taxes has fallen faster than from, for example, state sales taxes in many states.

Also, the Times claim that state tax collections are linked to federal taxes is, apparently, a reference to how some states couple their tax rates to the federal rate. That's true - but what the Times forgets to tell you is, many states are "decoupling" their taxes and tax rates from Uncle Sam's. As the Center for Budget and Policy Priorities could have told them.

If you want to know what's really the cause of all those states facing big budget crises, read States Face Fiscal Crunch after 1990s Spending Surge, by Chris Edwards, Stephen Moore, and Phil Kerpen at the libertarian Cato Institute, and for a good summary of the fiscally sane steps states should take to deal with budget crises, read Crisis in State Spending: A Guide for State Legislators, by at the non-partisan American Legislative Exchange Council.

UPDATE: Mickey Kaus has a thorough annihiliation of the NYT piece over at kausfiles. Scroll down to the top July 28 entry, titled How to 'Presume' Your Way onto the NYT Front Page.

UPDATE: Eric Umansky says the NYT piece is weak on evidence that state budget cuts is hurting the economy:

The thesis of the NYT's lead - "RED INK IN STATES BEGINNING TO HURT ECONOMIC RECOVERY" - isn't exactly supported by a mountain of evidence. In what seems like its best shot at providing hard numbers, the Times says states have cut spending between $20 billion-40 billion over the past two years, "no one knows exactly how much." That's in a $10 trillion economy.

Yes. Besides, state spending cuts due to less tax revenue are not a cause of a bad economy, but a reflection of it.