Fiscal Drag From State And Local Governments

Three economists from the Federal Reserve Bank of New York have recently published an analysis of the drag on the economy caused by reduced expenditures by state and local governments here. They show the state and local sector of our economy, representing about one seventh of the overall US economy, is currently dragging down gross domestic product (GDP) by a significant amount:




To explain why this is so, the economists remind us just what state and local governments do:

"What Do State and Local Governments Do?

State and local governments are a very important part of the U.S. economy. The sector employs nearly 20 million people, accounting for about one in seven U.S. nonfarm jobs and more than the manufacturing and construction sectors combined. Almost three-quarters of these jobs are in local government. Unlike the federal government, whose nondefense spending is largely devoted to transfer payments like social security, state and local governments are direct service providers, with primary responsibility for water, sewer, and transportation infrastructure as well as important public services like education and police and fire protection. The essential nature of these services, as well as the size of the sector relative to the U.S. economy, makes stresses to the sector of particular concern."

That is worth keeping in mind. State and local governments do not cause economic downturns. But they suffer from economic downturns at budget time and without outside help from the federal government, they can only make downturns worse.

The federal government can make them better, but only if those who govern have the vision and wisdom to act.

In a quixotic gesture, economists Paul Krugman and Richard Layard have published a manifesto laying out the essence of this case  for wise and effective action and are asking other economists to sign on. But economists aren't the problem, though many have contributed very bad ideas. Political leaders are the problem. And for some of them (many but not all Republicans) the agenda is precisely to make the economy worse rather than better so they can increase their hold on government at all levels after the next election. And many of their largest contributors don't care about employment, because they benefit from economic contraction.