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State Budget Cuts Slowing Economy

Analyzing the new GDP figures issued Friday, which showed state and local spending falling at the fastest rate in three decades, Matt Yglesias made the important point that the large cuts in state and local spending are a drag on the economy. The new figures are just the latest evidence that Congress should extend the Recovery Act’s fiscal relief to states.

In a recent speech, Council of Economic Advisers chair Christina Romer said that “to some extent we are seeing a replay of what happened during the recovery from the Great Depression, when a significant part of the fiscal stimulus by the Federal government was offset by fiscal contraction at the state and local level.”

While Matt’s correct that a larger fiscal relief package would have averted even more state and local cuts, the package Congress enacted has saved hundreds of thousands of jobs and preserved critical public services. (The Department of Education estimates that just one component of fiscal relief is funding 284,000 jobs, mostly in education.)

But as we’ve noted, the fiscal relief will mostly run out this year, whereas states are facing at least another two years of big budget shortfalls. Extending those funds would be a smart move for the economy.