Bob Herbert discusses the state of the states in today's NY Times.

States of Alarm There is something eerie, even a little unnerving, about the budget crises that continue to spread, like a contagious, crippling disease, to states and cities across the U.S. ... If you want a story with legs, this is it. President Bush will have a heck of a time getting the national economy back on track while states from coast to coast are trying to balance their budgets by raising taxes, cutting spending and laying off employees. The National Governors Association, in a report last month, said states are facing "the most dire fiscal situation since World War II." Nearly every state "is in fiscal crisis," the governors said. From nearly every perspective, the outlook is grim. "As states fight to balance their budgets, the solutions available to them are increasingly dire," the report said, "and some of the most difficult fiscal decisions have yet to be made." ... These problems cannot be solved without significant help from the federal government. The president of the U.S. Conference of Mayors, Thomas Menino of Boston, is hoping to form an alliance with the nation's governors to petition Washington for help.

I've been telling people for over a year that the crisis in state budgeting is a ticking time bomb that, when it goes off, will crash the national economy as well. For years the states have been moving away from more stable sources of funding (such as property taxes) to revenue sources (such as income taxes) that tend to be much less reliable. When the economy is going gangbusters, as it was in the 90s, the states rake in a lot of money. They use the windfall on new programs, in essence putting themselves in debt to the people of their state in the form of various state services. When the economy comes back down to earth and income revenues come down with them the result bites them in the ass. Hard. It's all a web of actions and reactions. The recession of 2001 brought down income tax receipts which seriously hurt state budgets and continues to do so to this day. The states, in response, will either have to raise taxes (bad news in a recessionary economy) or cut services. Either way, the result will be a continued drag on the economy, as Herbert so ably points out. The various state legislatures, being politicians, have been putting off the inevitable as long as they can because few have the courage to face reality. This just makes the problem fester and grow worse. When reality finally comes knocking the explosion will be even worse then it would have been if they had responded sooner. And the reverberations from that explosion will bounce throughout the economy onto the national level. This is why I have been predicting a double-dip recession for at least a year and why some of the more recent signs of positive economic growth haven't changed my opinion on that in the least. They say we are in a jobless recovery right now. For my money, a jobless recover is a fake recovery. How long before the illusion is shattered?