State and local government spending has already declined over the past 18 months, dampening growth and hiring
As Congress bickers over how to cut the deficit, some economists warn that cuts too deep too soon would endanger the recovery. Unfortunately, spending has already declined on the state and local government levels. As a result, we're seeing weaker results in the two economic indicators that matter the most: hiring and economic growth. Without the headwind created by the state and local governments, the recovery would look significantly stronger.
First, let's be clear what we're talking about here. The objection is not that state and local governments should have done more to stimulate the economy than they had in, say, 2009. The criticism is that if they hadn't done less, then the economic recovery would be on firmer footing.
A Recovery With 326,000 More Jobs
In March 2010, the U.S. economy finally began to add jobs again. Every month since then, private sector employment has grown. Yet almost every month since then, state and local governments have cut jobs. Without those layoffs, the U.S. labor market would have 326,000 more people employed through May 2011. Here's a chart showing job growth with and without the impact of state and local government cuts:
You can see that the jobs picture looks better if you exclude the effect of state and local government layoffs. The only real outlier was October 2010, when state and local governments added 31,000 jobs. If no government jobs had been shed since March 2010, the unemployment rate in May would have been 8.8% instead of 9.1%. That might not seem like a huge change, but surely there would be some positive benefit to consumer sentiment if the headline rate was below 9% at this time, instead of having ticked back above it over the past few months. Moreover, those 326,000 more people who would still have jobs would have spent more money to stimulate the economy.