Another major speed bump in the recovery of the US Economy is raising its ugly head: state government debt overhang.
California and Michigan are of course the twin poster children of State Government Debt. However, about 1/3 of the States have serious problems.
(1) If the States raise revenue through higher taxes they will directly depress private consumption (Demand) and possibly reduce their own revenue (Laffer Curve),
(2) If states reduce their budgets they must lay off government employees further increasing unemployment,
(3) State governments continue on their crash course, issue more bonds with the possibility of federal government guarantees, hence indirectly adding to Quantitative Easing (indirectly print money).
Moreover, this entire state government debt problem was predicted and published in an article in 2001 by The Economist: Red Ink Rising.
Red Ink Rising was later changed to: America's states go into the red.
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=E1_SPTVPJ
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