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There are economic consequences to budget cuts

Ken Jacobs, chair, UC Berkeley Center for Labor Research and Education | May 27, 2010

When it comes to jobs and the economy, not all solutions to the state’s budget shortfall are equal. Most measures designed by well-meaning state leaders to reduce the deficit also will depress employment and economic growth in California. But the magnitude of those impacts will vary significantly – depending on what measures are enacted – and the worst effects can be avoided.

That’s why it’s so important to pay close attention to the different budget proposals being put forward. We’ll all pay a high price if we don’t.

My colleagues Laurel Lucia, Bill Lester and I have modeled the impacts of the governor’s proposed 2010-2011 budget cuts on employment and economic output in the state and found that his cuts only approach would result in the loss of 330,000 full-time-equivalent jobs, boosting the state’s already high unemployment rate by another 1.8 percentage points. The cuts also would cost California families and businesses more than $36 billion in lost economic output, along with $1.9 billion in state and local taxes.

The projected job loss is greater than the total job growth projected by the Legislative Analyst’s Office for 2011.  This analysis was done using full-time equivalent jobs; because many of the human services jobs are part-time, the actual number of people affected would be much greater. In addition, we estimate that 270,000 adults and 123,000 dependent children would also lose job-based health insurance.

The worst of these impacts don’t have to become reality. We found that balancing cuts with $5.4 billion in targeted revenue increases from upper-income households, corporations and a new oil severance tax would save nearly 250,000 jobs – half of them in the private sector – and 18 billion in lost economic output.

The proposal from Assembly Speaker John Pérez released earlier this week, would go even further in avoiding the negative impacts on employment and providing additional stimulus to the economy. Under the Speaker’s proposal the state would essentially borrow the funds needed to balance the budget and pay it back over time through an oil severance tax.

The majority of jobs lost from the Governor’s proposal – 261,000 – would result from $5.4 billion in cuts to major health and human service programs that bring in significant federal matching funds.  This job loss is 15 times greater than the number of jobs that would be lost through an equivalent increase in revenue. Close to one-quarter of the budget savings from cuts to health and human services programs would be negated due to lost state and local tax revenue, the study concluded.

Cuts to CalWORKs, In-Home Supportive Services and health services for low-income populations hurt the economy more than the equivalent amount of revenue increases. That’s because these cuts would result in the loss of $6.8 billion in federal matching funds and take dollars out of the pockets of low-income residents, who are most likely to put them back into the economy immediately.

The effects of cuts in health and social service programs would, of course, go well beyond the impact on jobs and health insurance coverage. Cuts to CalWORKs and child care programs would create barriers for parents to stay in the workforce. Cuts to IHSS are likely to result in a higher number of elderly and disabled residents placed into nursing homes. Cuts to health programs will result in delays in needed care.

Robert Reich responded to our report this way:

It makes as much sense to cut social service programs in an economic downturn as to drill holes in a boat during a flood. As this important analysis makes clear, the governor’s proposed cuts would not only hurt the state’s most vulnerable people at a time when they most need help, the cuts would also harm the economy, hurting all Californians. In order to reduce the debt, it would be far wiser to raise taxes on corporations and the wealthy.

There is another alternative. In fact, as we have seen from the proposals coming out of the Assembly and the Senate this week, there are many. The State has to make a choice.

The report, “The Economic Consequences of Proposed California Budget Cuts,” is online at http://laborcenter.berkeley.edu/californiabudget/budget_impact10.pdf.

Comments to “There are economic consequences to budget cuts

  1. “In order to reduce the debt, it would be far wiser to raise taxes on corporations and the wealthy”

    This is exactly the type of thinking that got us into this mess. This is an open invitation to ask the type people who create jobs and pay taxes to leave and go somewhere else, which I understand is happening to a huge extent in California. Why don’t we have a budget that is within our means and create a climate that is hospitable to business? Isn’t that what built this state in the first place? Government’s appetite for taxpayer money is voracious, can never be satisfied and ultimately drives business elsewhere, whether it be another state or another country. Steve Jobs was a big supporter of Obama and then has the iPad made in China. I really resent that because I can’t just up and leave or outsource my business. Tell Jobs to bring his business back to California. That will bring in some sorely needed revenue and employment back to this state. Another thing, government spending is a negative multiplier according to one study I saw. We’ve overspent by 14 trillion dollars and the this is the worst economy since the Great Depression. The stimulus spending did nothing but make matters worse. If you really want to solve these problems and not just prolong the pain then create policies that limit the size of government and encourage economic activity. The key to this is less government spending, lower taxes and policies that encourages businesses to exist in California. Otherwise we are going to be sitting here 20 years from now arguing over the budget and trying to justify not cutting government spending while the state continues to fall apart.

  2. It is an absolute truth that the consequences of out of control budget cuts currently being forced upon all federal, state and local governments are totally unacceptable.

    What we must do first as our highest priority is to focus all of our resources on eliminating the root causes of civilization’s worst case scenario, global warming tipping point threats to humanity, or we shall never accomplish anything in time to avoid totally unacceptable calamity.

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