Are cuts to state and local government slowing economic growth?

Budget cutting governors like Tom Corbett and Chris Christie frequently promote the idea that slashing government spending will create economic growth. But according to figures released by the U.S. Commerce Department, the opposite may be true. The economy is recovering slower than expected, partially because state and local governments made steep cuts across the country.

The Commerce Department reported Friday that economic growth increased at an annual rate of 2.8 percent in the final quarter of last year. That was down from the initial estimate of 3.2 percent.
State and local governments, wrestling with budget shortfalls, cut spending at a 2.4 percent pace. That was much deeper than the 0.9 percent annualized cut first estimated and was the most since the start of 2010.

The government revised fourth-quarter growth to reflect a steeper contraction in government spending than previously estimated. Government spending declined at a 1.5 percent rate rather than 0.6 percent, due to weak state and local government outlays.

Why does this matter? For starters, the unemployment rate is still stuck at around 9 percent. Every time a state government lays off employees, it increases the overall number of people out of work. Second, government contracts are an important revenue generator for many companies. If a city is spending less on light bulbs, people who make light bulbs will make less money. Essentially, every action by government has an impact on the overall economy, some of which are very positive. When we make steep cuts to government spending, we are also diminishing activity that could help our economy recover.

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