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State And Local Government Austerity Is Over

So says Bill McBride over at Calculated Risk:

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has been adding added to GDP growth.

The red bars are the contribution from state and local governments.  Although not as big a drag as the housing bust, there was an unprecedented period of state and local austerity (not seen since the Depression).

Now state and local governments have added to GDP for two consecutive quarters, and I expect state and local governments to continue to make small positive contributions to GDP going forward.

I disagree with McBride that adding government employees helps the GDP, but he’s correct that it’s reflecting of improving state and local finances.  We’ve certainly seen that here in Colorado, and Federal tax revenues are also turning slightly upward.

But remember, the so-called “Stimulus” was really a massive transfer of debt (and some authority) from the state and local governments to the federal.  Look for the feds to start asking for some of that money back, although without returning the authority.  Since the “Stimulus” was never really sold that way in the first place, there’s going to be a lot of resistance from municipalities over this, especially now that they’re starting to see the looming pension threat.  That’s what happened when the time came for states to pay back those loans to their unemployment funds.

Posted in Economics.

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