I read an article in the UK Guardian over the weekend (July 14, 2012) – Scranton, Pennsylvania: where even the mayor is on minimum wage – which told a sorry tale of municipal bankruptcy in the US. There was an earlier story in the UK Daily Mail (June 26, 2012) – Camden, city of ruins: Depressing images of once-thriving metropolis reduced to decaying, crime-ridden rubble – that traversed similar terrain, except carried a number of graphic shorts of urban decay in the face of persistent recession. What these articles tell me is that the US Federal system has failed its people. The rigid balanced budget rules at the State level and the ideologically-driven unwillingness of the Federal government to use its currency powers to redress the damage caused by the application of those rules at the State level have combined to create wastelands across the urban landscape in the US. The damage that is being caused each day will haunt that nation for years to come. Meanwhile, the ideologues are trumpeting a new book about 4 per cent solutions that claim large-scale government cutbacks are needed to re-create the US as a great nation. From afar, one can only conclude that the US glory days (whatever they were) are passing – probably more quickly than they care to acknowledge.
The Guardian article predicted a:
… a wave of municipal bankruptcies is set to sweep the United States as towns, cities and counties plunge into a fiscal black hole, collapsing under the weight of huge debts and reduced revenues.
It is one of many reports that are emerging of once-thriving urban areas becoming unviable wastelands as employment dries up and state and local governments turn off the lights, sack the teachers and cops, and close down medical facilities.
This October 2011 Report – At the Edge: A Survey of New York State School Superintendents on Fiscal Matters – is truly staggering.
It tells us that in that state along, “schools absorbed one of the largest state aid cuts in history … [in 2011-12] … But 2011-12 is the third tough year for school budgets, not the first: 90% of districts are getting less help from the state than they were three years ago.”
Job cuts are escalating in New York State:
Districts reduced their workforce by an average of 4.9% this year; other, non-teaching student support positions took the steepest cuts – 8%. Position reductions were generally steepest among city and rural districts. These are reductions on top of those taken in prior years.
The story is repeating across the nation. The problem is not just an over-indebted private sector that has lost its thirst for credit and are not spending enough. It is not that the US manufacturing base is disappearing because US firms are increasingly exploiting cheap labour elsewhere.
The problem is that the US government is not reacting to these developments and seeing that they have a major role to play in providing a buffer to the non-government demise – to steer the economy through the private downturn and to minimise the overall job losses.
The problem is that the US government (at all levels) is deliberately undermining the growth of its own economy and destroying millions of jobs. In doing so it is worsening the problems associated with the ageing society.
It is cutting education services which are the one major source of future productivity growth for the nation. Skilled labour does not emerge from a schooling system being cut to threads by the mindless application of erroneous budget rules.
Contributions to real GDP growth by Sector
The following sequence of graphs are derived from the US Bureau of Economic Analysis and shows the contributions to quarterly real GDP growth in the US since the March-quarter 1990 to the March-quarter 2012 by government level (total, federal and state/local in order).
Since late December 2010, the overall government sector in the US has been undermining real GDP growth as its dysfunctional Congress battles for ground on which party can do the most damage.
The federal level has been a negative contributor to quarterly real GDP growth for four out of the last six quarters. The situation is even worse at the State and Local government levels.
Since March 2008, state and local governments together have been negative contributors to real GDP growth in 14 of the 17 quarters, and every quarter since September 2010.
If you also consider the previous recession periods since 1990, both levels of government were running counter-cyclical strategies (contributing positively to growth) in contrast to the present recession.
This is especially so when you consider the State and Local governments.
So as the private sector struggles to build momentum, the support that is typically (and correctly) provided by the public sector in the early phases of recovery has been absent in this crisis.
State and Local government revenues cannot expand when their economies are stagnating or recessing. It is a myopic strategy to attempt to run budget balances by cutting spending in a downward chase of cyclically declining revenue. We have several years of data to confirm that proposition.
While many (most) states are tied by balanced budget legislation (which I urge them to repeal and allow themselves fiscal freedom) the solution to their declining tax bases was clear.
The Federal government which has not such legislative constraint should have engaged in significant transfers to the states to ensure that state and local employment and activity was maintained during the crisis.
While I am extremely critical of the Eurozone for designing a flawed monetary union from the outset that was always destined to fail once it was hit by a large negative aggregate demand shock, the US system is not doing that much better. However, the Europeans will have to alter their entire monetary system to overcome its intrinsic flaw if it wants to avoid a worsening situation.
In the case of the US, all that was needed was some responsible federal fiscal policy initiatives to buffer the declining state revenues and allow these non-currency issuing levels of government to maintain employment.
The fact that the US government has largely failed to do that is an indictment of their fiscal irresponsibility.
US Employment by Sector
The appalling performance in terms of contribution to real GDP growth by the government sector in the US during this crisis has not only allowed the downturn to be deeper and longer than otherwise would have been the case had the government acted responsibility but it has also manifest in a dramatic plunge in public employment.
Responsible fiscal policy should be counter-cyclical. Governments in a fiat-currency system should never cut employment when the private sector is engaging in employment contraction.
The following graph shows the annual growth of employment by sector (total, private and government). The data is from the US Bureau of Labor Statistics.
It is clear that the public sector overall acted in a counter-cyclical manner with respect to employment (the trough in total is less than the private trough) but has failed so support growth since that time.
Public employment in the US has been contracting overall since September 2010 – which is an astounding result given the extremely high unemployment in that nation.
The next graph shows the annual growth in State and Local government employment since the March quarter 1990
To add to this analysis, I assembled some other information, to allow me to understand the scales involved a bit better.
The following Table shows the proportions of total US employment by sector (evaluated for each decade at January). March 2008 was the most recent peak in total employment.
What I found interesting is that, despite claims that the public sector is becoming increasingly large, the evidence suggests that it is not even keeping its proportional employment stake. Most stark is the drop in US Federal government employment shares – from 4 per cent of total employment in January 1970 to 2.1 per cent now.
There has been some small increase in the proportions of employment in State and Local governments over the same period. But overall, the US is still dominated by private employment.
How has this translated into employment?
The following Table shows the gains/losses in employment by sector (thousands) and the share of the total employment loss since the crisis began in March 2008 in the US.
The dramatic loss of jobs in the private sector is clear. Well above their share in total employment. The loss of government jobs is lower than their share but still large.
Overall, the federal government has slightly expanded its employment adding 55 thousand jobs since the downturn started in March 2008. But you can also appreciate the losses in the US Postal service over the same period.
The real employment damage is being done in the State and Local government areas (particularly in provision of local education).
Taken together the state and local government 557 thousand jobs over the recession – a pro-cyclical response to the private sector spending collapse.
This New York Times article (Novermber 29, 2011) – As Public Sector Sheds Jobs, Blacks Are Hit Hardest – is one of many that details the human face of this government failure.
It is one of many that have emerged during the crisis to document the losses on the ground that are now pervasive in the US (and worldwide).
The article describes a bus driver who:
… is one of tens of thousands of once solidly middle-class African-American government workers — bus drivers in Chicago, police officers and firefighters in Cleveland, nurses and doctors in Florida — who have been laid off since the recession ended in June 2009. Such job losses have blunted gains made in employment and wealth during the previous decade and undermined the stability of neighborhoods where there are now fewer black professionals who own homes or who get up every morning to go to work.
The article notes that “the recession and continuing economic downturn have been devastating to the American middle class as a whole … [but has] … been singularly harmful to middle-class blacks in terms of layoffs and unemployment …”
The pro-cyclical government cutbacks have introduced a vicious circle of income loss, saving loss, wealth destruction, continuing real estate crisis, loss of state and local revenue, further cutbacks according to the application of their inappropriate fiscal rules (balanced budget amendments).
The pro-cyclical nature of state and local government employment is one of the principle reasons the US recession has endured and will ensure the long-term damage to that nation’s vitality and ability to provide high quality services to its people.
The reasoning in the public debate about the future consequences of government budget deficits is wrong-headed. The capacity of the US to provide for an ageing society amidst the long-term decline in its industry doesn’t depend on cutting in to public spending now – which is patently causing law and order to deteriorate, the standard of public education and health to slip.
Exactly the opposite response is required. Schools need to be revitalised. Communities need to be sure the streets are safe so that businesses will have an incentive to invest. People need to be mentally and physically well.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.