Graph of the Day: Public Sector Layoffs are Undermining the Recovery
April was another lackluster month for job growth, according to today’s official report. Only 115,000 new jobs were created last month—a not-unexpected but still disappointing slowdown from December to February, when job growth was averaging 252,000 a month. The unemployment rate fell a tenth of a point to 8.1 percent, primarily because discouraged workers continue to drop out of the labor force. And the number of Americans without a job was essentially unchanged at 12.5 million, nearly half of whom have been unemployed for over six months.
The takeaway, writes economist Jared Bernstein, is that fiscal austerity isn’t working. “It doesn’t work here, it doesn’t work in Europe, it doesn’t work for state and local governments. I’m tempted to ask how many data points we need to recognize this crucial economic truth, but I’m afraid data points don’t have much to do with it.”
And there are plenty of data points. The graph above, of net monthly job growth since 2008, shows how public sector layoffs have created a substantial drag on growth as the economy struggles to take off. While we’re finally back to a net positive number of private sector jobs since the start of 2009, state and local governments have shed over 600,000 workers—12,000 in the past month alone. Nine out of ten of those jobs were in local education, which is down over 200,000 since 2010.
Boosting state and local government employment—especially of public school teachers, whose job it is to educate our children—should be a nonpartisan priority for legislators. But somewhere along the way, collective action became controversial and civic duty became politicized. Many conservative commentators now encourage public sector layoffs in the belief that smaller government is preferable to creating or maintaining government jobs. As if thousands of unemployed teachers will find more socially productive work now that they’re off the taxpayers’ dole.
Sadly, this is the state of the debate. We have the tools to stimulate the economy and get America back on track towards full employment, but half the political establishment is ideologically bound to tax cuts for the rich and dismantling the social safety net. For now, it looks like the economy will have to recover on its own.
Fiscal Drag Still Threatens the Recovery
Last week brought good news for the U.S. economy: according to the Labor Department, the headline unemployment rate fell to 8.3 percent as payrolls added 243,000 new jobs in January. That number climbs to 304,000 if you include the revised numbers for November and December, which underestimated employment by a full 60,000. And job growth was well distributed throughout the private sector, with impressive gains in professional and businesses services, leisure and hospitality, and manufacturing. “That sound you hear is champagne corks in the west wing,” tweeted Washington Post economics reporter Neil Irwin at the news.
But while it’s surely five o’clock somewhere (probably China, in this particular metaphor), champagne-soaked celebration would be premature. There are, as Ezra Klein points out, “fiscal bombs”—or perhaps more accurately a “fiscal minefield”—about to explode beneath our feet.
The problem is this: if current law holds, the payroll tax cut and expanded unemployment benefits will soon end, followed by the expiration of the Bush tax cuts and the winding down of what remains of the stimulus money. Then comes the implementation of the $1.2 trillion automatic sequester, which will take a huge bite out of Medicare and other non-defense discretionary spending. According to the CBO—which, crucially, must base its analysis solely on current law—those higher taxes and lower deficits will costs us 0.5 percent of GDP in 2012 and 1.65 percent in 2012—enough to slow economic growth to just 1 percent. The IMF agrees: they estimate such “fiscal drag” could cost the U.S. as much as 2 percent of GDP in 2012—”the largest annual fall in at least four decades.”
Decisive action from lawmakers to extend the payroll tax holiday, reinvest in infrastructure, and support state and local governments would go a long way toward preventing that fiscal drag until the economy is more solidly on its feet. As Jared Bernstein notes, the Recovery Act demonstrated just how effective state fiscal relief was for preserving local government jobs. Unfortunately, that money was temporary; now that the stimulus has run its course, we have returned to a hemorrhaging public sector, with 14,000 jobs lost just last month. Immediate action to keep police, teachers, and other state government employees on the payroll would go a long way toward avoiding “fiscal drag” and giving our local economies time to secure a meaningful recovery.
Graph of the Day: IMF Warns Global Economy Needs Stimulus, Not Austerity
By Benjamin Landy
Despite CBO estimates that prove the American Recovery and Reinvestment Act raised real GDP by as much as 4.2 percent in 2010 and created as many as 3.3 million jobs, Republicans continue to argue that fiscal austerity, not stimulus, must be the key to economic recovery. “To put it simply,” House Majority Leader Eric Cantor stated last spring, “less government spending means more private-sector jobs.”
Unfortunately, Cantor’s solution is not only simple, but wrong. According to a new report published this week by the International Monetary Fund, less government spending during periods of economic contraction “lowers incomes in the short term” and “raises unemployment, particularly long-term unemployment.” The report’s authors reached this conclusion after examining 173 episodes of government-imposed fiscal austerity over the last 30 years, with the average deficit reduction equal to 1 percent of GDP. They found that a 1 percent deficit cut had the effect of reducing real incomes by about 0.6 percent and raised unemployment by nearly 0.5 percent. In a liquidity trap situation like the one the United States finds itself in right now—where the Federal Reserve can’t cut interest rates any further—those losses were magnified twofold.
And it gets worse. The IMF report also found that in cases where governments chose to pursue austerity programs instead of deficit spending, income and employment levels frequently didn’t return to pre-recession levels “even after five years.” Recovery was even more painful when multiple countries tried to impose austerity measures simultaneously—as is currently happening in the eurozone—since not every country can devalue its currency to boost exports at the same time.
In order to determine how austerity measures affect different sectors of the economy, the report’s authors also looked at the differences between wages, profits, and rents during periods of fiscal contraction. Although this division “harks back to the times when the roles of workers, capitalists, and landlords were fairly distinct,” which have “eroded somewhat over time,” the separate analysis of different forms of income still functions as “a starting point for describing how income is divided between Main Street and Wall Street.”
The results aren’t pretty. According to the IMF’s research, real wages, which most lower class people rely on for their income, typically decreased by 0.9 percent for every 1 percent of GDP reduced by fiscal consolidation. Those who made their money from profits and rents, meanwhile, saw their inflation-adjusted income reduced by just 0.3 percent—and for a much shorter duration. That means that austerity measures tend to impact low-income earners at least three times more than their higher-income peers.
Of course, the report does not suggest that fiscal consolidation is never necessary. The IMF has frequently been the subject of criticism for its controversial “Structural Adjustment Programs,” which include sometimes brutal austerity measures for Third World countries as a precondition for receiving financial aid. Greece, for instance, is a clear example of a country whose sovereign debt has grown far beyond the bounds of a healthy debt-to-GDP ratio. But while the report acknowledges that all advanced economies need to reduce their debt in the medium term, it warns that “slamming on the brakes too quickly will hurt incomes and job prospects.” Deficit-reduction plans, it suggests, should only be implemented “when the recovery is more robust.”
The economic jargon obscures what should be a fairly obvious point: the report’s conclusion that “fiscal consolidations are contractionary, not expansionary” only means that you can’t throttle an economy and expect it to grow. If only more politicians could be made to understand that point.
“Repeal the 20th century. Vote GOP.”
Washington Post columnist Steven Pearlstein is stunned by the radicalism of the GOP presidential candidates:
If you came up with a bumper sticker that pulls together the platform of this year’s crop of Republican presidential candidates, it would have to be:
Repeal the 20th century. Vote GOP.
It’s not just the 21st century they want to turn the clock back on — health-care reform, global warming and the financial regulations passed in the wake of the recent financial crises and accounting scandals.
These folks are actually talking about repealing the Clean Air Act, the Clean Water Act and the Environmental Protection Agency, created in 1970s.
They’re talking about abolishing Medicare and Medicaid, which passed in the 1960s, and Social Security, created in the 1930s.
They reject as thoroughly discredited all of Keynesian economics, including the efficacy of fiscal stimulus, preferring the budget-balancing economic policies that turned the 1929 stock market crash into the Great Depression.
They also reject the efficacy of monetary stimulus to fight recession, and give the strong impression they wouldn’t mind abolishing the Federal Reserve and putting the country back on the gold standard.
They refuse to embrace Darwin’s theory of evolution, which has been widely accepted since the Scopes Trial of the 1920s.
One of them is even talking about repealing the 16th and 17th amendments to the Constitution, allowing for a federal income tax and the direct election of senators — landmarks of the Progressive Era.
What’s next — repeal of quantum physics?
Full editorial here.
Graph of the Day: Did Stimulus Money Hire the Unemployed?
By Benjamin Landy
According to a new research paper (PDF) by economists Garett Jones and Daniel Rothschild, “Did Stimulus Dollars Hire the Unemployed?” published by the conservative Mercatus Center, less than half of all employees hired with American Recovery and Reinvestment Act funds actually came from the ranks of the unemployed. “Hiring isn’t the same as net job creation,” the report argues. “In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations … were unemployed at the time they were hired. More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%) … This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed.”
Unsurprisingly, conservative economists like Tyler Cowen see Jones and Rothschild’s research as proof that the stimulus failed. “This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great ‘bang for the buck,’” writes Cowen on his blog Marginal Revolution. “It raises the question of whether as ‘twice as big’ [sic] stimulus really would have been enough.”
However, if you look more closely at the numbers, an alternative, more optimistic story about the ARRA emerges. First of all, for each of the 47.3 percent of workers who left their jobs for new, ARRA-subsidized positions, it is likely that another worker, potentially one who was previously unemployed, took their place. That means that job-shifters weren’t taking away opportunities from the unemployed; on the contrary, their stimulus-sponsored job mobility created a trickle-down effect, leading to new hiring at the businesses they left. Even if only half of these ‘second-order’ hires came from the ranks of the unemployed, that means that the true percentage of ARRA-subsidized jobs going to the unemployed is closer to 66 percent, not 42 percent.
Moreover, the report does not specifically detail how many people were able to keep their jobs thanks to ARRA funds. Even if no new jobs were created, a large amount of the stimulus money that went to the states enabled local governments to employ workers that would otherwise have been laid off. And in fact, Jones and Rothschild’s research indicates that the average organization receiving stimulus funds equal to 10 percent of its annual revenue reported retaining or hiring workers equal to 6 percent of its workforce. Which helps explain why, according to Recovery.gov, over 550,000 have been created or maintained by ARRA funds just between April and July of this year.
Of course, no one is claiming that the ARRA funds have been apportioned or managed perfectly — $787 billion is a lot of money. But considering the time constraints that the Obama administration was working under, it would be unreasonable to expect that such a massive economic stimulus could be implemented without some waste. That being said, the CBO estimates that relative to what would have happened without the law, the ARRA raised real GDP by between 1.5 percent and 4.2 percent in 2010, and boosted employment by as much as 3.3 million. That may be the kind of recovery that Cowen dismisses as not much “bang for the buck”, but I’d wager that the majority of the 14 million Americans who are currently unemployed would like to see more such stimulus, not less.
America’s Crumbling Infrastructure
By Benjamin Landy
In January 2009, as the American economy faltered and Congress struggled to agree on the size of an economic stimulus package, the American Society of Civil Engineers (ASCE) issued more disheartening news: according to their most recent assessment, the nation’s infrastructure was in its worst state in decades. “More than 26%, or one in four, of the nation’s bridges are either structurally deficient or functionally obsolete,” stated the report. “The number of deficient dams has risen to more than 4,000, including 1,819 high hazard potential dams… Poor road conditions cost motorists $67 billion a year in repairs and operating costs, and cost 14,000 Americans their lives. One-third of America’s major roads are in poor or mediocre condition and 36% of major urban highways are congested.” The ASCE gave America’s overall infrastructure a ‘D.’
For a moment, it seemed the ideal time to rebuild, putting millions of unemployed Americans to work in the spirit of FDR’s Civilian Conservation Corps or the Public Works Administration. “We can put Americans to work today building the infrastructure of tomorrow,” Barack Obama declared in his 2010 State of the Union Address, to thunderous applause. “From the first railroads to the Interstate Highway System, our nation has always been built to compete. There’s no reason Europe or China should have the fastest trains, or the new factories that manufacture clean energy products.”
And yet, since the American Recovery and Reinvestment Act was signed into law, little more than $100 billion has been allocated and spent on renewing the nation’s crumbling infrastructure, far short of the $2.2 trillion the ASCE estimated would be required over a five year period to raise their grade from ‘poor’ to ‘acceptable.’
Source: Congressional Budget Office, US Government Printing Office
Unfortunately, this current state of neglect is actually part of a much longer historical trend of de-investment. While the amount of money lavished on defense continues to rise far above the Cold War average, the United States spends less and less of its GDP on roads, bridges, rail and waterways every year. Infrastructure spending has been steadily declining since it peaked at 5.6% of GDP in 1961, and has fallen to around 2.5% today.
As Henry Petroski of Duke University points out, “infrastructure is a fancy contemporary term for what used to be known as public works.” Perhaps if Americans were more aware of the original terminology, they would once again recognize investing in their shared infrastructure as the civic responsibility that it truly is.
