FALL RIVER — For decades, Billy’s Cafe in Fall River was a favorite watering hole for the city’s police officers. So when Fall River lost $2.9 million in aid from the state in 2009 — prompting the layoffs of 53 officers, almost a quarter of the force — the bar and restaurant known for chourico and chips lost many of its regulars.
Billy’s Cafe never recovered, according to owner Rachel Valente, and after 80 years in business, Billy’s will close on Dec. 31.
The shuttering of this local institution displays the ripple effects that budget cuts in local governments can have on the economy — effects that reach beyond the police, teachers, firefighters, and clerks who lose jobs. As private employment has rebounded over the past three years, struggling local governments have slashed jobs and boosted taxes across the country, offsetting private sector gains and slowing the US recovery, economists said.
Since the recession ended in 2009, local governments have eliminated nearly 500,000 jobs, including 10,000 in Massachusetts, even as private employers have steadily increased payrolls. The problem for the economy is not just more jobless workers on unemployment rolls, but also, as Billy’s Cafe shows, a reduction in consumer spending that supports many other jobs and businesses.
The effects of local government cuts on the broader economy are part of a long-running policy debate that has come to the forefront again in Massachusetts, where Governor Deval Patrick has proposed trimming aid to cities and towns to help close a $540 million budget gap, and in Washington, where political leaders are grappling with the so-called fiscal cliff and possibility of deep spending cuts.
At issue is how and when to tackle mounting deficits and whether the federal government should continue stimulus spending until the economy strengthens. As the recovery has sputtered in recent years, many economists, including the Nobel laureate and MIT economics professor Peter Diamond, have called on Congress to provide additional aid to state and local governments to avoid cuts, layoffs, and tax increases that slow the economy.
In 2012 alone, the impact of state and local budget cuts has shaved more than a quarter percentage point off the US economic growth rate, according to Moody’s Analytics, a forecasting firm in West Chester, Pa. If state and local governments could have avoided these cuts and tax increases, the nation would have gained 350,000 more jobs this year, said Mark Zandi, Moody’s chief economist.
“State and local cuts have been a significant drag on the economy,” said Zandi.
In Dracut, the loss of state and federal dollars contributed to the town’s decision in the spring to eliminate 54 positions in the school system, including 21 teachers. One of them was Trevor Blanchet, 28-year-old history teacher.
Ultimately, Dracut High rehired Blanchet in the fall when a more senior history teacher was tapped to fill an administrative vacancy. “But I know I wouldn’t have been rehired if the other teacher hadn’t been promoted,” Blanchet said. “It’s not like we found more money.”
Dracut, Fall River, and other Massachusetts communities face a new round of budget cuts after Patrick announced a plan last week to reduce unrestricted aid to the state’s 351 cities and towns by $9 million. The proposal amounts to a 1 percent cut, but local aid has been slashed by a third since 2009.
The relentless cost-cutting of recent years might seem harsh, but states have few options, said Gregory Daco, senior principal US economist at IHS Global Insight, a business information and analytics company based in Lexington. Unlike the federal government, most state and local governments can’t run deficits and are required by law to balance budgets.
“What you have to do is basically what states have been doing — hunker down and not spend more than what you can take in,” Daco said.
In Fall River, that meant eliminating 149 jobs, or about 5 percent, in 2009 and cutting the workweek to four days for City Hall employees. The city also increased taxes and fees in each of the past three years, helping it to restore some of the cuts and jobs. Employees returned to a five-day schedule, and the police department regained 36 of 53 positions cut.
But Patrick’s proposed local aid cuts could mean another setback, said Mayor William A. Flanagan. “It’s as if we were just starting to get our head above water and then they poured on more,” he said.
With the economy recovering slowly and unemployment rates still elevated, many economists have argued for additional stimulus over the past two years. They have said that one of the fastest ways to get the money into the economy is to increase aid to state and local governments to help avoid budget cuts and tax increases until things pick up.
“A big part of what federal stimulus can do is help state and local governments — major employers — to bridge the gap to get out of this downturn,” said Robert Pollen, codirector of the Political Economy Research Institute at the University of Massachusetts Amherst.
In Washington, a key component of the debate over the fiscal cliff is whether to accept bigger short-term deficits until unemployment, 7.7 percent in November, declines significantly. Long-term deficits would be tackled after the economy strengthens. That is the strategy favored by President Obama.
Republicans, however, argue that deficits are out of control and the federal government, with more than $16 trillion in debt and climbing, must quickly address them soon, or risk the kind of financial and economic meltdown experienced in some European countries.
In Fall River, the city’s prospects have brightened since 2009. With finances stabilizing, businesses are increasingly willing to invest in the city.
Susan Dunse, a former Fall River teacher who was laid off in 2010, has invested her life’s savings in reopening Al Mac’s Diner, a once-popular haunt for city workers that also suffered from the budget cuts and closed earlier this year. Flanagan pointed to Al Mac’s as an encouraging sign but cautioned that with a new round of cuts, Fall River’s progress could prove illusory. “We’re on the road to recovery,” he said, “but any interruption can dramatically set us back.”Callum Borchers can be reached at email@example.com. Follow him on Twitter @callumborchers.