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State and Local Governments Finally End Years of Anti-Stimulus

January 6, 2015

As 2015 opens, the American economy seems poised for robust economic expansion. Strong GDP growth and job creation, falling first-time jobless claims, surging stocks and (finally) rising wages show the Obama recovery from the Bush recession which began in late 2007 is starting to hit on all cylinders.
And to be sure, it is the Obama recovery. After all, as the nonpartisan Congressional Budget Office (CBO) and the overwhelming consensus of economists agree, it was the $800 billion stimulus program along with action by the Fed that fueled the economic rebound which prevented "Great Depression 2.0." But America's bounce-back could have bigger and happened much faster but for the draconian austerity programs embraced by state and local governments. Their steep spending cuts and painful lay-offs constituted an "anti-stimulus" that has significantly slowed America's recovery since 2008.

But as the New York Times reported, that fiscal drag is finally starting to end:

For a long stretch, government spending cutbacks at all levels were a substantial drag on economic growth. Now, finally, relief is in sight.
For the first time since 2011, local, state and federal governments are providing a small but significant increase to prosperity.
"There's not a lot of positive contribution coming from the government sector, but when you're talking about economic growth, less of a negative is a positive," said Chris Varvares, senior managing director and co-founder of Macroeconomic Advisers.

The Times' first chart above does not fully capture just how big of a negative the public sector contraction has been on the U.S. economic recovery. The tragedy is that the Obama Economic Miracle could have been even more miraculous if Republicans on Capitol Hill and in state and local governments hadn't stood in his way. DC Republicans didn't just block Obama initiatives like the American Jobs Act and infrastructure investment that could have boosted employment when unemployment was mired at 9 percent and strangle job creation and consumer confidence with their debt ceiling hostage-taking. The destructive austerity policies of state and local governments created an "anti-stimulus," with layoffs of public sector workers and cuts to spending that only served to undermine the gains from ARRA (see the second chart above). By May 2013, the Hamilton Institute estimated those austerity policies cost 2.2 American million jobs and resulted in the slowest recovery since World War II. In April 2012, the Economic Policy Institute explained:

The current recovery is the only one that has seen public-sector losses over its first 31 months...If public-sector employment had grown since June 2009 by the average amount it grew in the three previous recoveries (2.8 percent) instead of shrinking by 2.5 percent, there would be 1.2 million more public-sector jobs in the U.S. economy today. In addition, these extra public-sector jobs would have helped preserve about 500,000 private-sector jobs.

That March, Paul Krugman expressed the same point, but with some inconvenient historical context for the Party of Reagan. "In fact, if it weren't for this destructive fiscal austerity," Krugman explained, "Our unemployment rate would almost certainly be lower now than it was at a comparable stage of the 'Morning in America' recovery during the Reagan era."

We're talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc., than are currently employed in such jobs.
And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower than it is, or below 7 percent -- significantly better than the Reagan economy at this stage.

Yet even with all those barriers erected by his political opponents, Barack Obama is still "out-Reaganing Reagan." And Obama didn't triple the national debt while doing it.
Mercifully, state and local governments are finally getting rid of the economic albatross around their necks. A big driver has been increased spending on construction projects by states and municipalities, which as the New York Times also reported last month, "is finally on the rise again."

Sadly, the U.S. is not out of the woods yet. For starters, plummeting energy prices are slashing tax revenues in several states, especially in Louisiana. Worse still, Republicans majorities in Congress and in state legislatures are poised to unlearn all of the lessons of the public sector austerity they alone championed. While federal spending has been flat and deficits more than halved since Barack Obama first took the oath of office, the focus of the new Republican Congress is to "cut deficit" and "balance the budget." Meanwhile, despite the fiscal fiasco resulting from massive tax-cuts in Sam Brownback's Kansas and Chris Christie's New Jersey, the new red state legislatures are planning to "cut personal and corporate income taxes." The inevitable result will be shocking shortfalls in tax revenue, staggering reductions to spending, cash-starved infrastructure and more public sector layoffs.
To put it another way, the Republican anti-stimulus could be on its way back to snatch economic defeat from the jaws of victory.


About

Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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