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Public-sector belt-tightening: thrift, or long-term drag on US economy?

Since June 2009, 504,000 jobs have been cut among municipal employees. Public-sector reductions at the local level have subtracted almost a quarter of a percentage point from annual GDP each of the past four years.

By Ron SchererStaff writer / July 31, 2012

Brian Lykins works part time for the Liberty Township Fire Department in Ohio. He was laid off from a full-time position in nearby Middletown, Ohio.

Melanie Stetson Freeman/Staff

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Liberty Township, Ohio

This summer, firefighter Brian Lykins canceled his vacation to Nashville, horseback-riding summer camp for one daughter, and summer softball for another daughter. As for eating out: "It's something we seldom get to do," he says.

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The reason: Mr. Lykins, a single father with three young daughters, was laid off Jan. 1 from his full-time job in Middletown, Ohio, where he had been working since 2010. Now, he works part time for two fire departments but gets half the pay and no health-care benefits.

"And on top of that, the fridge died in April," he says.

Lykins is hardly the only public employee encountering such challenges. For three years, city governments have been shrinking their workforces. Most communities pay their municipal employees and fund their schools and other services using tax revenues and fees collected for licenses and other things. But with home prices falling six consecutive years, property taxes are falling. And for states that have income-tax collections, the overall high unemployment rate has also eaten into revenue.

The resulting cuts in local government have subtracted almost one-quarter of a percentage point from annual gross domestic product (adjusted for inflation) each of the past four years, Moody's Analytics estimates. The total impact during that period: about $150 billion. Moreover, the cuts have accelerated over the past year, according to Moody's.

These reductions, economists say, act as a drag on the economy. Former park employees, clerks, and firefighters such as Lykins are buying only the necessities. Cities are deferring road work, which means contractors aren't hiring people to pour concrete. By far, the largest impact is on school systems, which are laying off teachers, counselors, and janitors.

Last Friday, in its advance estimate of GDP, the Bureau of Economic Analysis reported that economic growth in the second quarter rose by a modest 1.5 percent on an annual basis. One reason the BEA cited for the lackluster performance: “a negative contribution from state and local government spending.”

Some worry about the potential for longer-term ramifications, such as children falling behind their overseas peers, and companies building factories in other countries that have better roads for doing business.

"There is a legitimate debate about the cost structure of state and local government," says chief economist Mark Zandi of Moody's Analytics in West Chester, Pa. "But people lose sight of the fact that economic competitiveness is not just the tax rate, but the skill of workers and the quality of our infrastructure from the roads and bridges to our telecommunications, airports, and electric grid. All those things matter a lot to business."

A poll by CBS News/New York Times in mid-July found the public was almost evenly split on the issue of reducing local services if it meant lower taxes. However, when asked specifically about reducing the number of firefighters, police, even libraries and parks, most people said they were unwilling to make cuts.

What communities do spend on goods and services is of no small importance to the US economy. For example, police departments typically replace half their cruisers each year. Municipalities outsource road repair to contractors. Many cities hire companies to provide meals for their jails and schools.

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