State and Local Spending Cuts Dampen the Recovery

By :: July 30th, 2012

On Friday, the Bureau of Economic Analysis released its first look at Gross Domestic Product and its components for the second quarter of the year plus revisions going back to 2009. Those data confirmed that weak government spending continues to hamper the economy.  In the second quarter, government spending declines subtracted more than a quarter point from GDP growth, almost exclusively from the state and local government sector.

State and local spending cuts also dragged the economy down in 2010 and 2011. In 2011, the state and local sector contracted 3.4 percent, the largest decline since World War II.

In 2009, real GDP fell 3.1 percent, the largest contraction since 1946, and would have contracted even more without government spending. That decline is smaller than previously reported because of an upward revision in state and local spending. Most of the revision was to the final quarters of 2009 which was the same time as the American Reinvestment and Recovery Act (ARRA) began distributing funds.

The level of state and local spending in 2010 was revised up by a similar amount, so the rate of decline from 2009 to 2010 remained the same at 1.8 percent. The pace of decline in 2011, however, increased by over one percentage point.  Instead of state and local government spending contracting by 2.2 percent it turns out the contraction was 3.4 percent.  By late 2010 and 2011, the ARRA money was mostly spent, revenues were still well below the peak and states began cutting expenditures in earnest.  Many of the cuts in spending were not done as part of the normal budget process.  The National Association of State Budget Officers reported in its Spring 2012 Fiscal Survey of States that in fiscal year 2010, 39 states made mid-year budget cuts and 19 made mid-year cuts in FY 2011.  Given the urgent nature of the changes required over the last four years, it is likely that the accounting for the crisis is not yet complete.

11Comments

  1. Michael Bindner  ::  3:49 pm on July 30th, 2012:

    Some jurisdictions have the political courage to raise taxes to deal with lowering property values and foreclosures. Those that do are in less decline and have services that stay at normal levels. Sadly, some local yokels are likely sinking their own towns to make Obama look bad. Their voters need to wake up and remove them from office. Austerity does not work any better here than it does in Europe. In the short term, however, the only solution is for state and local officials to lean on their members of Congress during the August recess to vote for more intergovernmental aid.

  2. chromehawk  ::  12:46 am on July 31st, 2012:

    As Mr. Bindner above points out. The main cause of this is State and Local governments get their revenue from property and sales tax.
    Mr. Bindner’s solution on the other hand won’t work.
    A) Voters are not voting out local politicians who refuse to raise taxes. THEY ARE VOTING OUT THE ONES WHO DO!
    And in states like California, where all tax increases MUST be approved by the voters … They are pretty much saying No. Even here in Seattle we said no to a measly $50 per year tax on car registration. If $50 per year won’t pass in Seattle. It won’t anywhere.
    B) lean on their Congressmen? You do know Republicans control congress right? And if they did not the Congressman would ask the local “Did you have aspirations of higher office? Because if you did, forget about it. WE in DCLean on YOU!”
    And even if those two issues were not there the Congressman would say “You couldn’t get your VOTERSTo give you a measly $50 per car. Why should WEListen to you or bail out your stupid constituents?”

    Sorry State and Local budgets are going to continue to decline until the economy recovers.

  3. AMTbuff  ::  2:32 pm on July 31st, 2012:

    Government spending helps the recovery the same way that taking another drink helps reduce a hangover. It’s a short-term help that increases the long-term consequences which must be faced sooner or later. Let’s sober up now!

    We need to stop acting as if we have the money to fund government’s promises — the sooner the better. This is happening first at the state and local level because they can’t print money.

  4. Bruce Thompson  ::  8:03 pm on July 31st, 2012:

    Any research showing that those that do raise taxes have less decline?

  5. Jaqueline Smith  ::  1:03 am on August 1st, 2012:

    “Those data confirmed that weak government spending continues to hamper the economy.” And this is a surprise?

    In my government office, we have laid-off 24% of staff. Of those laid-off, only 1 has a job — the rest are still on unemployment.

    How was any other result expected?

    Proposed solution: If they had kept 24% of the staff and enacted a 10% straight across-the-board salary cut — no one would be leaching-off unemployment, and all would still be active consumers. Hmmm.

  6. Herb Smith  ::  9:43 am on August 1st, 2012:

    Your long run agenda of reducing government spending keeps the nation from getting out of this slump. The fastest way to reduce government deficits is to put industry and the unemployed back to work on needed infrastructure and education projects.

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