There was an important subtext to last week’s news that the economy grew at 2.3 percent during the last quarter.
During the past four years, fiscal belt-tightening by federal, state and local government created a drag on the overall economy, according to economic analysts. Spending dropped sharply in 2009 and continued to slump through mid-2013 – meaning cuts in labor and social programs and loss of construction projects.
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But the good news last week was that this picture is changing. Slightly more robust federal, state and local spending were responsible for about two-tenths of a percentage point of the overall 2.3 percent national economic growth spurt in April, May and June.
While 0.22 points of growth may not seem like much to the average American, it suggests that state and local governments have finally crossed the line from being a drag on the economy to becoming a modest engine of growth.
Or as Louise Sheiner, a senior fellow in economic studies at the Hutchins Center on Fiscal and Monetary Policy, put it late last week, “The fiscal headwinds are finally behind us.”
“Overall, fiscal policies have been about neutral (zero) over the past year,” she wrote in a blog post for the Brookings Institute. “Fiscal policy is no longer a source of contraction for the economy, but neither is it a source of strength.”
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This progress – albeit it minor – was documented by the Hutchins Center’s Fiscal Impact Measure – a device that estimates the effect of federal, state and local spending and taxes on inflation-adjusted growth in the Gross Domestic Product.
As the chart below indicates, the trend in federal, state and local spending, taxes and transfer payments at all levels of government have been in a trough for the past four years. Now they have broken into positive territory.
The comeback in state and local government spending and economic expansion after the worst recession in modern history has been a mixed picture at best. A number of studies by think tanks have heralded a comeback in the state and local tax base, and an increased willingness of officials to expand their workforces and launch new projects.
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Late last year, a report by the National Association of State Budget Officers forecasted “moderate growth and stability of state budgets in fiscal 2015.” The study said general fund spending and revenues were projected to increase for the fifth consecutive year, based on the enacted budgets of the states.