The economy and the states: Less of a drag AMERICA has been here before. A steady labour market recovery seemed possible early in 2010, when GDP growth approached 4%, until panic over a developing European debt crisis kept unemployment aloft for much of the year. Many expected 2011 to be different; instead high oil prices and disasters, natural and political, left the economy perilously close to recession. Despite a surprisingly strong end to 2011, Americans chastened by recent history are unwilling to conclude that a corner has at long last been turned. Not without reason. The euro will continue to fray nerves, as will a slowdown in emerging markets and political dysfunction at home. Yet there are more grounds for hope than previously. America's housing market is much closer to health. Prices remain wobbly, but sales and construction are rising from record lows. Residential investment will probably contribute positively to growth in 2012, rather than negatively. The same may also be true of state and local governments, which have likewise proven a steady drag on growth since the end of the recession in 2009. Almost all state and local governments are prohibited from running deficits. When the recession led to a dramatic decline in tax revenues, these governments had to make deep cuts to spending. In 2009 and 2010 this austerity offset much of the expansionary effect of federal-government stimulus. Even in 2011, according to a Goldman Sachs estimate, government spending cuts reduced America's GDP growth by half a percentage point. State and local governments bore most of the blame: they have been responsible for nearly 600,000 government jobs going since the recession's end. In just the year to November, over 70,000 jobs were lost at the state level, with local government shedding another 180,000 (see chart). This pain may now be mercifully near its end. Since late 2007, when the recession began, states have closed budget gaps of $500 billion through tax rises and spending cuts. Tax revenues are slowly recovering, however, leading to a slowdown in the pace of cuts and a reduction in the impact of state and local budget woes on the growth of the overall economy. The experience in America's largest state is telling. California must plug a $13 billion budget hole over the next 18 months, a daunting figure until one recalls the $42 billion gap the state faced in 2009. True, there is less fat to trim now. But a strengthening state economy will aid the state's leaders. In the year to November, California's private sector added over 200,000 jobs; in 2009 it shed 857,000 workers. The tax revenue contributed by these new hires (and the reduced demand for unemployment services) has given the state the budget room to curtail heavy cuts to state payrolls. Government employment in California declined, year-over-year, for 31 consecutive months from 2009 to 2011. But it rose by nearly 25,000 jobs in the year to November. Not every state has done as well. Where recovery remains elusive, revenues have not yet allowed governments to sheath their budget knives. State and local governments trimmed 16,000 jobs in November - down from 45,000 in May but still a negative number. Yet the worst appears to be over. And just as local austerity amplified the previous economic decline, its end should reinforce the recovery.