Declines in State and Local Government Spending Continue to Drag Economy Down
State Capitol, Augusta, ME (cc photo by jimbowen0306)
Here’s some important details buried inside the new GDP figures:
Real federal government consumption expenditures and gross investment increased 1.4 percent in the first quarter, compared with no change in the fourth. National defense increased 1.2 percent, incontrast to a decrease of 3.6 percent. Nondefense increased 1.7 percent, compared with an increase of 8.3 percent. Real state and local government consumption expenditures and gross investment decreased 3.8 percent, compared with a decrease of 2.2 percent.
The point here is that contrary to the impression fostered by the right of a grasping federal government crushing everything, all increases in federal spending have been doing lately is partially offsetting recession-induced declines in state and local government spending. Those declines are very economically damaging. If you ignore the large element of the American Recovery and Reinvestment Act that was dedicated to cutting taxes, the largest spending element was aid to state and local governments to prevent tax hikes and these kind of spending cuts. In an ideal world, Congress would have appropriated even more funds for these purposes than was in the initial problem. Instead, the Senators from Maine teamed up with some moderate Democrats to scale it back. It’s been a huge mistake and we’re likely to continue paying the price for it in terms of sub-trend output for years to come.