State governments are not allowed to operate with deficits as the federal government can. The feds have a monopoly on money creation through the US Treasury and the Federal Reserve, so states must make do with what they can collect from the people living and working within the boundaries and not rely on the printing press. This requirement to balance budgets is putting a strain on local and state governments as tax revenues decrease.
The most prominent state in the government battle so far has been California, which has been in the news constantly since the housing market collapsed. With such a large government and such high foreclosure rates, it is becoming increasingly desperate for the Golden State. The squeeze is already on counties, which have not been reimbursed by the state for required programs. In response, some counties have threatened to put a hold tax revenue payments to the state. The government of the state has requested bailout funds from Congress while threatening to lower state workers' wages down to the minimum wage, even as counties are expected to forward taxes to the state but go without funds for promised services.
Another state that one would not think was hit hard by the recession and foreclosure crisis, Kansas of all places, is also hurting for money. A recent news article by the AP reports that the state has stopped processing tax refunds for constituents. Now it is the homeowners and workers themselves living in Kansas that are being squeezed directly as the state refuses to send out the money that they overpaid in taxes throughout the year. In fact, some people deliberately overpay each year, counting on a sizable refund check. This theft of tax return money will only hurt these families who may have used the funds to pay down debt or even stop foreclosure if they are really in need of it.
All the talk of supporting local businesses and punishing giant Wall Street firms and multinational banks may also be translating into action at the state government level. Former Illinois Governor Rod Blagojevich, before being arrested on suspicion of attempting to sell a vacant Senate seat, had announced plans to remove state funds from Bank of America after the lender would not continue to support a local Chicago business. Other states may begin to follow suit by moving taxpayer funds from the largest banks (with headquarters in New York, California, or Dubai) to smaller, local and regional banks.
Such an action of removing state funds from the multinational banks would have the consequence of strengthening lending in local markets to local businesses which employ local workers. But such a measure would also be combated by the large banks, even though these banks are the ones that set up the housing market for collapse and have taken the profits from the bubble offshore already. It will take strong state and local governments to begin denying funds to multinational banks and instead supporting local businesses.
The spending of the stimulus bill recently passed by Congress is one way that the federal government is attempting to address the growing discontent among bureaucrats down the line. Vast infrastructure spending is one way to transfer money from people to the federal government to state governments to local governments to preferred contractors who will spend the money and increase tax revenue to the layers of government. This measure may kick the government bankruptcy can down the road a little way, but meaningful changes will have to be made to address the crisis in the long term.
Each new bailout and spending package has been designed to prevent corporations from having to declare bankruptcy, but has not addressed why these failing institutions did not plan for any but the rosiest futures. And each new spending program that is released to great fanfare but fails to stop the recession erodes more of the peoples' trust in the government. Over $8.5 trillion has been injected into the system by the Federal Reserve or appropriated for programs by Congress, but nearly 500,000 jobs are being lost every month.
Any erosion in the level of trust people have towards the government will be met with an equal or greater erosion of trust that government officials have in the people. But what happens when one level of government loses trust in another level of government? With the vast, vast number of regulations, from federal to state to local, government has infiltrated nearly every aspect of peoples' lives. With money becoming tighter and a recession lingering for over a year now, and with preferred corporations being given new bailouts every week, state governments may have to become leaner and more independent of the federal government if they wish to survive.