CHART OF THE DAY: State And Local Governments Are Holding Back The Economy

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The recent financial crisis and economic downturn have been uniquely bad for state and local governments.  And this is bad news since state and local governments account for a huge part of the economy.  Nora Fitzpatrick, Andrew Haughwout, and Elizabeth Setren of The New York Fed’s Liberty Street Economics write:

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.

According to the Liberty Street Economicsproperty taxes and intergovernmental transfers account for upwards of 70 per cent of local government revenue.

Those property taxes have cratered due to the housing crisis and Federal aid has declined dramatically since the stimulus ended.

The centre for Budget and Policy Priorities estimates that states alone had to deal with more than $430 billion in budget shortfalls between 2009 and 2011 to comply with balanced budget requirements. This has forced huge job and spending cuts, reducing GDP by an estimated 0.4 per cent in the first quarter of 2011.

This chart from Liberty Street’s blog post shows how much worse this fiscal drag has been, even as the rest of the economy has shown growth.

Fiscal Drag On States

Photo: Federal Reserve Bank of New York

Check out the full post at Liberty Street Economics for more. 

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