From an earlier post:
Let’s start with compensatory aid for the states. State (and cities) typically have a much worse time during a recession than the federal government because they (a) can’t print their own money and (b) have to balance their budgets. So when revenues decrease, states have few options save for trimming their own expenditures.
Calculated Risk, an economics blogs, says that we’ve lost 232,000 state and city jobs so far this year. And in California, things look like they’re going to get worse. From the Huffington Post:
Because revenue is projected to fall short by more than $2 billion, the state could cut public school funding by up to $1.4 billion, though that amount will have to be determined by Brown's finance director. Besides laying off school staff, cutting expenses and dipping into reserves, the state could allow school districts to reduce the school year by up to seven days, from 175 to 168. California had 180 school days before the recession hit.
California's unemployment rate – under 5 percent as recently as 2006 – has remained above 11 percent for more than two years.... It projects California's jobless rate will remain above 10 percent through the middle of 2014 and above 8 percent through 2017.
In short, direct aid to the states is a very efficient form of stimulus because it can prevent exactly the kinds of lay-offs and cut-backs that California is facing. Also, according to the Congressional Budget Office, they also have a relatively high multiplier effect – somewhere between 0.7 and 1.8.
Now, from the notorious pinko rag the Wall Street Journal:
One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought.
The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.