Sources: BEA, BLS
Last year, state and local squeeze shaved about 0.3% off of GDP and cost 266,000 jobs. A simple regression of state/local job losses on the GDP contribution finds that for every point of growth that the states and locals take off of GDP, employment in the sectors falls around 700,000.
We generally recognize that GDP losses map onto job losses but the fit is not usually this tight—there are lags in the generalized relationship between growth and jobs and lots of other moving parts. But that’s less the case in state and local governments. Here, the chain of events is pretty obvious and pretty clear. You squeeze their budgets, it shows up quickly and directly in growth and jobs.
Conversely, and here’s the policy part, were we to use federal stimulus to help relieve their budgets, we could get this relationship running in a better direction.We need more federal assistance (aka "stimulus") to state and local governments. Of course, given the current Congress it's not going to happen.
Update: The always righteous Larry Mishel (president of the Economic Policy Institute) points out that the job losses I’m citing above are only part of the story. States and cities buy private services and contract with private firms. Ethan Pollack writes: “For each dollar of budget cuts, over half of the jobs and economic activity lost are likely to be in the private sector.”