On This PageMarch 1992, No. 55

This Chicago Fed Letter examines the growing importance of state and local government behavior during economic recovery and the implications for the recovery anticipated for 1992. Examination of state and local fiscal actions over the business cycle indicates that this sector may be partly responsible for the sluggish recovery in parts of the nation.

Caution: State and Local Governments Brake for Recessions
Last Updated: 03/31/92
Continued sluggishness in the U.S. economy has prompted widespread interest in federal proposals aimed at 'Jump starting" the economy. These actions are designed to use the countercyclical tools available to government, such as tax cuts and spending hikes, to spur economic growth through fiscal policy. However, these countercyclical measures are being proposed on the heels of a record increase in state and local taxes. To what extent will the stimulative effects of federal actions be counteracted by recessionary adjustments being made by state and local governments?