G.D.P. Data Show How Smaller Government Is a Drag on Growth - NYTimes.com: My colleagues Motoko Rich and David Streitfeld and I had an article today focusing on how rising oil prices are threatening America’s fragile economic recovery. But we could just have easily written another 1,000 words on the perils shrinking governments now present to the economy. Item No. 1 is today’s revised report on gross domestic product for the last quarter of 2010. Output last quarter grew more slowly than initially reported, according to the Bureau of Economic Analysis: an annual rate of 2.8 percent rather than 3.2 percent. One of the main reasons for the downward revision was that state and local governments cut their spending at a 2.4 percent annual pace. That was a much sharper decline than the 0.9 percent first estimated. The drop was also faster than what the country had experienced in the previous two quarters, reflecting the fact that state and local budgets are in more trouble than ever.
A decline in state and local spending — and the layoffs that are likely to be involved — can have dangerous reverberations throughout the economy. So would the cut in federal spending that many Congressional Republicans have been threatening. Besides chucking even more workers into the pool of the unemployed, such cutbacks would also take away services supporting the many Americans trying to get back on their feet. This in turn hurts their ability to spend, threatening the bottom lines of the businesses they patronize, potentially leading to even more layoffs in the private sector. And so on.
In other words, government cutbacks during a weak economy affect much more than just government payrolls.