States in Distress

Your editorial today misses the major economic point about the stimulus (New York Times, August 4, 2009: A18). It is supposed to compensate for the loss in aggregate demand due to consumers leaving the marketplace. As you say, much of the stimulus money is being used by states to reduce the amount they have to slash in terms of employment or services.

That is good as it prevents things from getting worse in terms of aggregate demand, but it does nothing to replace the reduction in demand due to individuals failing to make purchases of goods and services.

In addition to the current stimulus, we need direct aid to states so they will not continue to slash and burn. And, despite the political unpalatability, we need it now.

Sent to New York Times