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How State and Local Governments Are Crucial to the Economy

They employ millions of people and buy trillions of dollars in goods and services from the private sector. Congress and the White House should keep these numbers in mind as they debate pandemic aid.

In the debate in Washington over additional pandemic fiscal aid to state and local governments, the fact that they constitute a huge component of the economy seems to have been overlooked or forgotten. State and local governments' severe fiscal problems could cause the recession to drag on longer than otherwise while also hurting public services.

Many people — both federal officials and the public — don't seem to realize how crucial state and local governments are economically. Most of us likely think only about our own city or state, which may not seem that large. However, state and local governments, taken together, comprise one of the nation's largest industries, so they have a much greater economic impact than many understand.

State governments, local governments (including not only cities but also counties, towns and school districts) and public colleges in aggregate employ almost 19 million people, one in seven of all workers nationally. (It was nearly 20 million before the recession, but more than 1 million already have lost jobs.) More people work for these governments than in manufacturing, construction, leisure and hospitality, and retail and wholesale trade.

These workers include more than 4 million on the front lines of public service dealing with the pandemic, including those in public hospitals, police and fire, public health, transit, and corrections. Other state and local government workers provide crucial services including K-12 and higher education, management and maintenance of water and sewer systems, waste collection, administration of social insurance programs such as unemployment insurance and Medicaid, and the judicial system. State and local government employees earn more than $1 trillion annually, money that they, like other Americans, use to pay for housing, food, clothing, health care, transportation, utilities and many other goods and services sold by private businesses.

But the overall economic impact of state and local governments is even greater than employment suggests. State and local government expenditures, as reported by the Census Bureau, represent nearly 19 percent of GDP and more than 21 percent of personal income. More than half of that spending goes to provide education and health services, crucial for all families and individuals.

In addition to paying employees and providing public services, it is sometimes forgotten that state and local governments are substantial buyers of goods and services from private businesses. By one estimate, state and local governments spend as much as $2 trillion each year purchasing goods and services from private businesses. When a state or a county repairs a road or bridge, or when a school district builds a new school, private contractors are hired to do the work. Governments buy computers, furniture, vehicles and other equipment from private business. Medicaid and other health-care programs pay for services from doctors and nurses, hospitals and pharmacies. These governments also purchase materials and supplies, including motor fuel, electricity and natural gas, books, paper, software, and chemicals (salt for the roads in winter, for example).

In my state, Michigan, spending by the state and its localities accounts for 21 percent of personal income, those governments employ 550,000 people, they pay about $26 billion in wages and salaries to those workers, and they buy about $59 billion worth of goods and services from private businesses. Check out the numbers for your own state.

As the pandemic continues, our state and local governments are facing substantial and yet uncertain budget challenges due both to severe revenue declines and additional service requirements stemming from the pandemic. Estimates vary, but projected budget deficits of at least 5 to 10 percent are common and seem likely.

What Congress and the Trump administration decide will have major implications for every state and community. Without federal support, additional cuts in state and local spending, or higher taxes, seem likely. Even a 5 percent cut in state and local employment and spending could mean 950,000 more unemployed or furloughed workers and $100 billion less in purchasing from private businesses. Either would slow the recovery of the overall economy, given both how large the state and local sector is and how interconnected it is with private business. Simply put, we cannot afford that.

The views expressed are the author's alone and do not necessarily represent the views of Michigan State University or its officials, or of Governing's editors or management.

A professor of economics at Michigan State University
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