Good News: The Government's Going to Stop Hurting the Economy So Much

The budget deficit is falling fast. That's great news if you're worried about the nation's debt. But it's less enjoyable if you're concerned about economic growth in the short run.

Between spending cuts and job layoffs, governments (state, local, and federal) have been a net drag on GDP growth in 11 of the last 13 quarters. That isn't a political statement; it's just what the numbers show:

Source: Bureau of Economic Analysis.

A good way to visualize what's going on here is to look at the jobs market. Since the recession ended in June 2009, the split between the private and government sector is night and day. Private companies have been adding to their payrolls at a good clip. Government employment, driven by state and local districts, has been in constant decline:

Source: Bureau of Labor Statistics.

But better news might be on the horizon. JPMorgan Chase chief U.S. economist Michael Feroli has a new report this week measuring how much fiscal drag has slowed the economy. Governments boosted economic growth by 0.4% in 2010, when the stimulus package was at its peak. That became a 0.6% drag in 2011, a 1.2% drag in 2012, and what should be a peak of 1.8% drag this year, before falling to a 0.8% drag in 2014.

One of the biggest drags on economic growth, in other words, may be about to let up.

Congress can, of course, change the laws at any time -- all of this is subject to change. But we seem to be moving in the right direction. 

Interested in more about the government's role in the economy? Check out my free report, "Everything You Need to Know About the National Debt." It walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report. 


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