New GDP Numbers Show Historic Drop in State and Local Spending

State and local government spending on goods and services fell at a faster rate — and hence had a bigger negative impact on economic growth — in 2011 than in any year in the last six decades,  Commerce Department data released today show (see graph).

When states and localities cut spending, they lay off employees (656,000 jobs lost since state and local employment peaked in August 2008), cancel contracts with vendors, eliminate or cut payments to businesses and nonprofits that provide services, and slash benefit payments to individuals.  In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money to buy things.  This directly removes demand from the economy.

State and local governments have cut deeply their spending on schools and other public services for three straight years.  In fact, economic output from state and local governments fell by 2.3 percent in 2011 — marking the steepest drop since the wartime economy of 1944.  By reducing economic activity, these cuts have slowed the economic recovery.  (The tally includes state and local spending on education, transportation, public safety, and human services, among other areas.  It doesn’t include government benefits such as cash assistance and Medicaid, whose costs grew as the number of eligible beneficiaries rose after the recession hit.)

Three major factors contributed to the steep 2011 decline:  depressed revenues (which are still about 6 percent below pre-recession levels), the depletion of states’ reserve funds, and the end of emergency federal aid in June 2011.

Many states now writing their budgets for next year are again finding that they lack the revenue to pay for fundamental state services, despite the major cuts of previous years.  Unless states raise new revenue, the spending cuts will likely continue.