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Austerity: Kind of a drag

Sylvia Allegretto, Economist, Co-Chair of the Center on Wage and Employment Dynamics | February 12, 2013

“Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink.” –from New York Times columnist Paul Krugman (2/8/13).

Krugman, I and others have cautioned against austerity for years. It simply never made any sense to make an already weak economy weaker by slashing government spending before having a sustained and robust recovery. But, as job losses were mounting to post-depression unprecedented highs, the deficit hawks swept in. They ignored all that we know about economic theory and practice and pivoted from the real crisis of jobs to the presently non-threatening issue of government deficits and debt.

My recent brief (Allegretto & Reidenbach 2013) gives an accounting of austerity by analyzing spending cuts in California, national GDP and the resulting declines in public sector employment. In short, evidence is mounting that austerity has been a drag on our economy (as well as in Europe where triple-dip isn’t a reference to ice cream).

The chart shows California’s employment growth by sector (total, private, and state/local government) 39 months into recovery. In total, employment is up 1.9 percent, which is not far from the 1.5 percent increase to this point following the 2001 recession, and much more than the -2.2 percent associated with the early-1990s prolonged jobless recovery.

Significant differences become evident when the private sector is compared to the public sector. Gains in the private sector (3.6 percent) are far outstripping the last two recoveries, but these gains are diminished by the unusually large decline (6.7 percent) in the S&L government workforce. These are the steepest losses in public sector employment on record for California. California now has the same number of government workers (non-federal) as it did in the spring of 2001, even though the state’s population grew by almost nine percent. The paper discusses more about the nature of the cuts, but education was hit very hard…meaning teachers.

CPER CA austerity

Other highlights in the brief include:

• The housing bust in California was huge. Average home prices around the country declined by 24 percent from peak to trough, while the decline inCalifornia cities was 45 percent.

• State budget cuts have weakened the U.S. recovery as decreases in government outlays shaved off up to a percentage point in quarterly economic growth.

• Surprisingly, private sector job growth in California, at this point into recovery, is better than it was following the 2001 and 1990 recessions. However, the huge cuts in the non-federal government workforce have severely mitigated overall employment growth.

• It is estimated that without the state budget cuts, reductions to public sector employment, and the resultant ripple effects into the broader economy, California would have over half-a-million more jobs today — with half of them being in the private sector.

• In sum, this brief suggests that austerity pursuits at a time of high unemployment and negative or low growth only lead to a more weakened economy and a delay in economic recovery.

The CBO recently reported that the U.S. economy (including the looming sequester cuts of 1.2 trillion) will continue below potential for another five years–which would mean the economy will have woefully under-performed for the period of a decade (2008-17); the true costs (e.g. lost output, wages, cuts in government programs, disinvestment in education, etc.) of such a period are incalculable.