The public sector is still hobbling the economy.
THE fates of the American economy and the presidency of Barack Obama are inextricably linked, and both of them hit a bump in April. The economy added 252,000 jobs each month between December and February, but that rate seems to be slowing. Payrolls rose by just 154,000 in March and by only 115,000 in April. Unemployment dropped in April, from 8.2% to 8.1%, but for the wrong reason: an exodus of some 342,000 workers from the labour force, as people gave up looking for work. On May 8th Mr Obama sent Congress a “to-do list”, asking it for tax incentives and mortgage refinancing in the hope of boosting private job creation. Yet for much of the past two years the biggest source of job losses has been the public sector.
Government payrolls typically swell in economic recoveries, by 5.9% on average during the first 34 months after a recession has ended, according to data from the Bureau of Labour Statistics. Not this time, however: from June of 2009 government employment dropped by 2.7% (see chart). The 2.5m overall rise in employment since the downturn’s end corresponds to 3.1m new private jobs, less 600,000 lost government ones.
The bloodletting has been concentrated at local level. Despite a drop of 52,000 over the past year, federal government employment is unchanged since mid-2009. The states, by contrast, have shed roughly 100,000 workers over that period, while local governments have cut over 500,000 jobs, most of them in education.
Budget constraints are to blame. Most state and local governments are not allowed to borrow to cover shortfalls. So when tax revenues plummet, as they did during and after the recession, spending must fall in concert. Local governments, which rely heavily on property taxes to fund local schools, have been particularly hard hit by the prolonged slump in house values. Consequently, employment in public education is down by 266,000 since 2009. A “right-sizing” of state and local governments was certainly in order after the boom. Yet cuts in teaching staff may be unsustainable, since large classes are unpopular; and though it is too early to assess the cost to pupils, they could also prove damaging in the longer term.
Things might have been worse. The 2009 stimulus package included roughly $140 billion in support for state and local governments, spread over two-and-a-half years. That figure covered between 30% and 40% of state shortfalls in the 2009-11 fiscal years, according to the Centre on Budget and Policy Priorities, a think-tank based in Washington, DC. Now, though, the stimulus tap has run dry. Worse, the federal government is increasingly a drag on state and local budgets, as Washington cuts its own spending.
The lean times should, however, end soon. Over half of the 50 states are forecast to end the current fiscal year with more money than expected, thanks to fatter tax collections as the economy recovers. Several price indices point to stabilising house values, which should buoy up property-tax revenues and education budgets.
It may take time, though. State government payrolls rose by 1,000 in April, but local government employment dropped yet again, by 12,000. Government may soon contribute to recovery alongside the private sector; but perhaps not soon enough for Mr Obama.