In our country, tax cuts and spending increases gave the economy a badly needed boost in the depths of the recession and early in the recovery. But these stimulus measures have been expiring. At the same time, states and localities have cut spending and raised taxes as they struggle to balance their budgets. As a result, fiscal policy in the United States has shifted from the accelerator to the brakes as far as growth is concerned.
The numbers tell the story. Government consumption expenditures and investment have declined 5.3 percent over the past two years, adjusted for inflation. That’s equivalent to more than a 1 percent reduction in gross domestic product. Meanwhile, state, local, and federal government employment has fallen by 570,000 jobs, or 2½ percent, over the past four years.
Including these cuts, federal, state, and local government employment now make up about 16½ percent of all employment. Let me put that number in perspective. Figure 1 shows the trends in government employment as a share of total employment since 1955. The current government share is roughly the same as the average of the past 20 years, and well below the peak reached in the 1970s. Interestingly, federal employees constitute only about 2 percent of total employment today. That figure is less than half of what it was in the early 1960s.
Of course, the elephant in the room in terms of fiscal policy are the huge federal deficits we’ve been amassing. Figure 2 shows federal deficits as a share of gross domestic product starting in 1930 and including projections by the nonpartisan Congressional Budget Office for the next 10 years based on current law. In recent years, taxes as a share of GDP fell to their lowest level since the early 1950s, while spending rose to its highest level. The result has been the widest deficits of the post–World War II era—over 10 percent of GDP in 2009 and projected still at 7 percent in 2012—requiring the government to borrow over a trillion dollars in that fiscal year.
This huge deficit is in part a product of the recession and slow recovery. As businesses closed and jobs disappeared, tax revenue fell. Meanwhile, spending soared as more people qualified for programs such as unemployment insurance. In addition, Congress and the White House boosted spending and cut taxes to stimulate the economy. Finally, unrelated to the downturn, tax rates put in place early in the past decade cut into federal revenue.
The drag on the economy could turn dramatically worse at the beginning of 2013…
via The Federal Reserve Bank of San Francisco: Economic Research, Educational Resources, Community Development, Consumer and Banking Information.
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