WASHINGTON -- The latest round of budget-balancing tax increases and spending cuts by state and local governments is increasing the risk that the national economy will fall back into recession after a short-lived recovery, economists say.
A large number of state and local governments, to preserve their credit status and comply with balanced budget mandates, have ordered severe fiscal measures aimed at eliminating inflated deficits whose total the National Governors' Association has estimated at between $30 billion and $50 billion in fiscal 1992.
Some states, such as California and North Carolina, are making up nearly half of their shortfalls with new taxes, while others are laying off thousands of state workers to help reduce spending. Steven Gold, director of the Center for Study of the States, estimated that tax increases in 16 states alone could total a record of $19 billion this year.
"It's kind of crazy to me," said Robert Brusca, chief economist with Nikko Securities, when such action is viewed against the backdrop of an economy that shows only weak signs of recovering from a yearlong slump. While economic indicators in recent months have shown signs of a pickup in business and manufacturing, government policies at all levels are serving to depress the still fragile recovery, he said.
"We have no antirecession policy in this country," he said, "and at the state and local level, we have an anti-Keynesian policy" that actually defies the economic axiom that governments should spend more and go further into debt during a recession to counteract the downturn in the private sector.
Mr. Brusca and other economists cited backward state and local fiscal policies as one of the primary reasons the economy stands the risk of plunging back into recession after staging a brief recovery -- a phenomenon they refer to as a "double-dip" downturn.
Alan Greenspan, chairman of the Federal Reserve Board, last week voiced confidence that such a relapse is not in the cards, though he said the national eco9nomy was suffering a drag from state and local budget problems.
Philip Braverman, chief economist with DKB Securities Corp., said the retrenchment of state and local governments could help send the economy back into a tailspin because it has been "superimposed" against a bleak background of "high and rising real interest rates, the pronounced credit crunch, and crippling debt burdens."
The cutbacks by state and local governments may be felt all the more because the federal government, with its chronically huge deficits, is able to do nothing further to stimulate the economy, the economists said. Alan Lerner, economist with Bankers Trust Co., described the governments' collective inability to address economic problems as "the ossification of fiscal policy in the U.S."
Mr. Gold argued, however, that the "size of the fiscal drag should not be exaggerated." Despite some budget cuts, state and local governments are likely to spend more on goods and services this year than last, he said, and to the extent that they enact massive tax increases to finance that higher spending, it may not be all that bad for the economy.
Prof. Edward M. Gramlich of the University of Michigan outlined the dilemma facing state and local governments in recent testimony before the House Budget Committee. "The deficits cause one kind of problem, and the bringing under control causes another kind of problem," he said.
"Rather than operating countercyclical fiscal policy, states operate perverse fiscal policy -- cutting spending and/or raising taxes just at the wrong time," he said. "This is bad from a macroeconomic standpoint . . . There must be a better way."
He said states should take over the leadership role in fiscal policy abdicated by the federal government in the past decade and, despite their budget-balancing requirements, try to "run countercyclical deficit policies in bad years."
States could do so, he said, because in most instances state law enables them to accumulate cash surpluses in "good years," when the economy is growing, and then use that surplus to finance deficits in recession years. Unfortunately, he said, states cannot do this because -- like the federal government -- they failed to save any money during the 1980s economic expansion.
