One Of The Biggest Forces That's Been Holding Back The Economy Is Finally About To Disappear

If you want to find “austerity” in the United States, the clearest place to look is at the state and local government level.

Here’s a look at total employment (red line) vs. public sector employment (blue line) going back to 2007. The public sector has been a net drag on the economy virtually every month, even up until now.

FREDAnyway, the NYT reports today in a key phenomenon happening around the country.

Contrary to the predictions of all the people predicting a muni collapse, states are increasingly flush with cash, reporting budget surpluses. That even includes California! Now there’s a fight on what to do with the cash, rather than a fight on what to cut.

Calculated Risk, of course, has some great thoughts on the matter, but the big one is that the state and local drag is mostly over.

This chart from Calculated Risk shows how state and local spending has been a net drag on the economy every quarter since the recession.

StateLocalGDPQ12013

With states now deciding how to put that extra cash to work, those red lines should turn positive.

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