Cuts in services at the state and local level continue to act as a drag on economic growth, and will continue to do so in the coming year - unless there is a significant course correction by policymakers.
Friday's jobs report from the Bureau of Labor Statistic provides the latest evidence. BLS estimates that states, cities, counties, school districts, and other units of government cut another 12,000 jobs in December, bringing to 426,000 the number of jobs lost since August 2008. Here's the breakdown:
Local school districts have cut 154,000 education jobs since August 2008.
Cities, counties, and other local governments have cut 202,000 jobs.
State governments have cut 69,000 jobs.
The previous week, the Commerce Department reported that cuts in the services that states and localities provide were responsible for slicing one-tenth of a percentage point off GDP growth in the October-December period. That may not sound like a lot. But as the recovery struggles to pick up steam, the last thing it needs is a push in the wrong direction.
This bad situation may get even worse. Economist Mark Zandi told a Congressional committee last Thursday that he expects a new round of spending cuts at the state and local level to shave another 0.4 percentage points off GDP growth over the course of 2011. Goldman-Sachs similarly predicts a similar impact of 0.5 percentage points.
Those predictions may actually be optimistic. Our latest survey found that states must find $125 billion worth of spending cuts or other budget-balancing measures for the 2012 fiscal year, which begins July 1 in most states. If states pursue a cuts-only approach to closing these gaps, as opposed to tapping reserves and raising additional revenues, the loss of GDP could approach a full percentage point and slow job creation by as much as 850,000 public- and private-sector jobs.
Unfortunately, it looks like many of the nation's governors are taking just that kind of cuts-only approach to resolving their budget gaps. State legislators should reject this course and take a more balanced approach.