State and local governments reaction to recession
In this article we examine the behavior of
the state and local sector during the business
cycle, paying particular attention to those discretionary
actions such as tax hikes and spending
cuts that are typically taken by state and
local government to maintain fiscal balance in
response to business contractions. In particular,
we focus on the discretionary fiscal actions of
the five Seventh District states (Illinois, Indiana,
Iowa, Michigan, and Wisconsin). No two
business cycle episodes are identical, especially
for the state and local sector which must cope
with sharp changes in the direction of federal
grant-in-aid programs. This time around, state
and local fiscal pressures are arising from spending
pressures as much as from lagging revenues.
In response, solutions to budgetary stress are
likely to focus on spending cuts as well.
