Janet Yellen blamed the slow recovery in part on the fact that “State and local governments were cutting spending…” As a matter of national income and product accounting, it is true that cuts in state and local government purchases subtract from GDP, but these cuts are mainly an endogenous consequence not an exogenous cause of the weak recovery.His latest is the claim that state governments with balanced budget constraints are forced to adopt austerity during recessions. But isn’t this the reason we adopted Federal revenue sharing in the first place. OK, Taylor has resigned from the community of honest economists to join Team Republican but can we point out one consistency in his 2009 testimony and his latest:
Consider the following two charts. The first shows how state and local government purchases have been essentially flat in nominal terms in the past few years.He also graph nominal purchases back in his 2009 testimony. Odd – don’t macroeconomists normally talk about real purchases, which is how our graph is drawn? In real terms, state and local government purchases have fallen after 2009. They were also showing stagnation in 2008 as the recession got started but they showed a bump in 2009 when ARRA implemented its temporary Federal revenue sharing. Oops – doing this in real terms sort of undermines what Taylor was trying to claim.