https://www.epi.org/blog/without-federal-aid-many-state-and-local-governments-could-make-the-same-budget-cuts-that-hampered-the-last-economic-recovery/
If policymakers should learn one lesson from the long, sluggish recovery from the Great Recession, it is that cutting public spending, particularly by state and local governments, is a recipe for prolonged economic pain. My colleague Josh Bivens has described in detail how the state and local austerity of the early 2010s was both an unprecedented cutback in public spending following a recession and directly to blame for the slow pace of recovery.
Unfortunately, facing massive projected losses in revenue as the coronavirus has forced them to lock down their economies, many state and local governments are already cutting critical services and laying off staff. The April jobs report showed that nearly 981,000 state and local public-sector jobs have already been lost. To put that in perspective, that's more than all the state and local public-sector jobs lost in the Great Recession and its aftermath.
As shown in Figure A, the peak for state and local government employment occurred in July 2008. As state and local budgets deteriorated throughout that year, governments began cutting services and staff. When the recession officially ended in June 2009, lawmakers in many states were already cutting services and staff, choosing to slash budgets rather than pursuing new revenues. These cuts accelerated in 2010 as relief funding from the federal recovery act dried up, and continued for several years, particularly in many states where conservative lawmakers took control following the 2010 elections. The result was a loss of nearly 800,000 state and local public sector jobs by July 2013.
It's critical to note, however, that not every state was cutting staff and services during this time. From July 2008 to July 2013, 18 states either preserved or grew their state and local public-sector workforces—keeping teachers, police, firefighters, nurses, and other critical service providers on the job. As shown in Figure B, the 18 states that did not make cuts tended, on average, to grow their public-sector workforce by 3.3%, while 32 states and the District of Columbia cut their state and local public-sector workforce (S&L) by an average of 4.1%. States that preserved or grew their public-sector workforce fared much better coming out of the recession, with fewer job losses overall, fewer private-sector job cuts, less growth in unemployment, and faster job growth as the recovery took hold.
From July 2008 to July 2013, total nonfarm employment shrunk by 1.7% in states that cut their state and local workforce, yet grew slightly (0.6%) in states that preserved or grew their state and local public sector. Of course, total nonfarm employment includes state and local government workers, so it's important to consider the employment changes strictly in the private sector. The pattern is the same: On average, states that kept teachers, nurses, firefighters, and other public-sector workers on the job essentially maintained the same level of private-sector employment over this period. In contrast, states that cut state and local government employment lost, on average, 1.3% of jobs outside of state and local government.i
This loss in nongovernment jobs isn't all that surprising given that for every dollar spent by state and local governments, more than half of the resulting economic activity occurs in the private sector. States and local governments that lay people off are not only adding those workers to the unemployment rolls, they are also threatening private-sector jobs that depend upon the spending of public-sector staff.
Analyzing differences in unemployment rate changes is a little less straightforward than job numbers since workers giving up looking for work can lower unemployment. Still, states that cut state and local public-sector jobs did experience larger increases in unemployment, on average, than states that preserved their public sectors. From July 2008 to July 2013, the unemployment rate rose by an average of 1.6 percentage points in states that cut state and local public-sector jobs, while only growing 1.2 percentage points in states that preserved those jobs.
Federal aid to states in the wake of the recession was woefully inadequate, yet state lawmakers' decisions on how to respond to budget shortfalls—cutting staff and services or seeking new revenues— contributed to two fairly distinct trajectories of state recovery. Figure Cshows the different job growth trajectories for states that cut their state and local government services and staff versus states that preserved or grew their state and local workforce. From June 2009 to June 2015, states that preserved or grew their state and local public workforce averaged total nonfarm job growth of 8.8% and 10.5% growth in the private sector. In contrast, states that cut their public sectors averaged total nonfarm growth of only 6.2%, with 8.2% growth in the private sector.
We can see the same trend looking at individual states, illustrated in Figure D. The more a state cut their state and local public-sector workforce, the fewer private-sector jobs they tended to add in the first six years of the recovery.ii
In fact, states that maintained their public-sector workforce recovered more than a year and a half faster than states that made cuts. Public-sector-preserving states went from their total nonfarm job trough back to their pre-recession level of employment in 49 months, on average. For public-sector-cutting states, it took an average of 68 months.
No one knows when the threat of the coronavirus will subside, but mitigating the economic hardship caused by the pandemic is within lawmakers' control. States' experience in the Great Recession and its aftermath offers a clear cautionary tale of how not to respond to an economic downturn and large drop-offs in revenue. The best thing that lawmakers can do to bolster an economic recovery—whenever that is possible—is to preserve the critical public services that keep local economies running. Congress must send aid to state and local governments to ease the budget shortfall that states and localities are facing because of the pandemic. At the same time, state lawmakers should seize this moment to reform tax systems whose regressive designs in many states exacerbate inequality, which—on its own—hinders growth. State lawmakers should establish new, progressive sources of revenue that can support strong public services, make state tax systems more equitable, and are better able to recover from future recessions.
i. All the values in these calculations exclude data for North Dakota. During this period, North Dakota experienced a boom in natural gas production that caused an enormous, atypical increase in jobs. Over this period, North Dakota grew their state and local public sector workforce; including it skews the averages significantly upward.
ii. There is undoubtedly some two-way causality here. Just as cuts to the public sector lead to less private-sector consumption, declining private-sector jobs lead to lower tax revenues which lead to cuts to the state and local public sector. Yet looking at lagged changes during the period of large state and local public-sector cuts does show the same overall trend. For example, examining private-sector job changes from June 2011 to June 2012 relative to state and local job changes from June 2010 to June 2011 presents a similar picture. Moreover, if private-sector job loss were driving cuts to the public sector, policymakers would need to take action to break that cycle, and stabilizing demand through expanded public spending is typically the simplest way to do just that.
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