What If the Government Didn't Cut Jobs?

It's election season, and the economy is weak. That's a breeding ground for accusations that the government is responsible for the weakness -- particularly the high unemployment rate.

And it's true. Governments are responsible for a lot of today's high unemployment. But maybe not in the way most consider.

Sure, dumb regulations, bad policy, and uncertainty are holding the economy back from its potential. But that's subjective and hard to measure. What we can measure is how much state, local, and federal job cuts have added to the unemployment rate over the last few years. And those numbers might surprise you.

Since 2009, the private economy has created 1.3 million jobs, and governments have shed 1.3 million jobs, according to the Bureau of Labor Statistics' household survey. Justin Lahart of The Wall Street Journal used that data yesterday to ask: What would the unemployment rate be today if governments hadn't been slashing jobs over the last 3.5 years?

His rough conclusion (emphasis mine): "If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%."

That got me thinking. Not only have there been large government job losses over the last 3.5 years, but most periods over the last several decades have experienced a large rise in government jobs. A recent example: The government sector added 1.5 million jobs from 2002 to 2006. Between 1950 and 2008, government employment increased by an average of 286,000 jobs per year, with a fairly steady growth rate. If we had that kind of growth in government employment over the last few years, our unemployment rate would be far lower than it is today.

So what if, rather than holding government employment steady at December 2008 levels as Lahart does, you assume that it grew at the same rate from 2009-2012 as it did from 2005-2008? You get this:

Source: Bureau of Labor Statistics. Y-axis doesn't start at zero to better show change.

A current unemployment rate of... drumroll... 6.5%.

Now, I'm not usually a fan of these alternate histories. You can prove anything if you suspend reality and assume what you want.

And this isn't necessarily a criticism of government job cuts. Most recent cuts occurred at the state and local level, where lawmakers had generally become addicted to booming tax revenue from the housing bubble and expanded far beyond what they could afford. Since most state and local governments have to balance their budgets yearly, there's little they can do now other than tighten the ol' belt. The last thing the country needs is fewer teachers and police officers, but there's also a stubborn need to obey the laws of budget arithmetic. John Maynard Keynes said, "The boom, not the slump, is the right time for austerity." State and local governments have done just the opposite.

So why bring this up? Because too many debates about jobs and budgets these days forget basic facts:

  • Government cuts are masking a private-sector rebound that is stronger than most give it credit for. Private businesses have created a respectable number of jobs in recent years. Not enough, but government jobs cuts have turned what would otherwise be a slow recovery into an awful one. The S&P 500 (INDEX: ^GSPC  ) and Dow (INDEX: ^DJI  ) fell on Friday after the monthly jobs report came in below expectations. The report would have exceeded expectations if readings of previous months' government jobs hadn't been revised lower.
  • Austerity may be necessary at some point and at some levels, but it doesn't occur in a vacuum. Make big cuts to government spending, and big job losses follow. As investing great Jeff Gundlach said last week, "It is metaphysically clear that if we attack the deficit, the economy will go negative."

What do you think? Sound off in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On May 10, 2012, at 10:39 AM, mdk0611 wrote:

    Of course the last thing we need is fewer teachers in the classroom and fewer cops on the beat. But why were they the main casualties? Were there no other state and local workers who could have been layed off? Shouldn't have technology made administrative functions more efficient, hence reducing the number of employees needed. Most of us are electronically filing our tax returns at this point. Wouldn't it have been more efficient to reduce the number of employees who used to manually process those returns rather than teachers in the classroom and cops on the beat?

    Your quote from Keynes was excellent. For the last 10-15 years states and municipalities should have been reducing segments of their workforce, ideally through retirement and attrition with no layoffs. It didn't happen. The unfortunate result was cutting muscle from the body while, in all likelyhood, leaving some fat intact.

    The only thing worse, in my opinion, is raising taxes on a group of taxpayers who were in the worst position to manage those hikes in recent memory (although there is a wide variation between states with respect to this).

  • Report this Comment On May 10, 2012, at 11:09 AM, bignort2001 wrote:

    The article ignores that states have to balance their budgets, and ALL of the "government cuts" have come from the state governments. Federal employment is up over the Obama administration.

    While the deficits importance can be overstated, Gundlach's statement is for ever increasing government spending, because attacking the deficit will adversely affect the economy. I guess we should just shovel all of our money to the government so they can keep our economy afloat.

    Lastly, the Keynes quote is nice, but ignores reality. Governments don't cut during the boom, that is when they extend their spending. They then don't cut during the downturn (unless, as states do now, they have no choice) because it would hurt the economy. Therefore government spending never goes anywhere but up, and massive malinvestment, such as we have now, is the result. At least until the entire house of cards collapses.

  • Report this Comment On May 10, 2012, at 11:19 AM, TMFMorgan wrote:

    <<The article ignores that states have to balance their budgets, >>

    From the article:

    "Since most state and local governments have to balance their budgets yearly..."

  • Report this Comment On May 10, 2012, at 11:35 AM, CluckChicken wrote:

    "Of course the last thing we need is fewer teachers in the classroom and fewer cops on the beat. But why were they the main casualties? Were there no other state and local workers who could have been layed off?"

    During the late 90s and through the 00s growth years many state governments cut taxes and/or did not expand as much as they should have. So many states ended up with no "fat" to cut so you are left with police and teachers.

  • Report this Comment On May 10, 2012, at 11:54 AM, Turfscape wrote:

    @bignort2001

    >>Federal employment is up over the Obama administration<<

    It was also up over the course of the George W. Bush administration, the Reagan administration, the Carter administration, the Ford administration, Nixon, LBJ, Kennedy and Eisenhower administrations...thank goodness for George H. W. Bush and Bill Clinton, right?

    >>Lastly, the Keynes quote is nice, but ignores reality. <<

    Yep. People accuse governments of using failed Keynesian policies, but governments haven't actually tried Keynesian policies. Nor has any government tried Austrian-school policies. In fact, there are almost no examples of real economic theories actually being put into real practice. Bits and pieces, sure...but, ultimately, politicians use the right words, but the wrong actions.

  • Report this Comment On May 10, 2012, at 12:05 PM, TMFMorgan wrote:

    ^ +1,000

  • Report this Comment On May 10, 2012, at 2:49 PM, mdk0611 wrote:

    Cluck - Your response conveniently ignores the very current example I cited. With so many tax returns now being electronically filed, what about those who were previously entering the paper returns into the state's system? Why should they be retained over teachers in the classroom. Within education, the amout of administrative personel over the last 30 years has increased far more than the number of teachers in the classroom. Why should they be exempt?

    And while there might be some departments in state governments that didn't expand where there was a need, I'm not aware of any state where, in the aggregate, total state employment did not expand as much or MORE than was necessary.

  • Report this Comment On May 12, 2012, at 6:47 PM, ReddTiger wrote:

    This is a good article by Morgan. While I would like to see smaller government, the cutting back of jobs by the government during a recession compounds the problem.

  • Report this Comment On May 13, 2012, at 3:52 AM, CaptainWidget wrote:

    <<Sure, dumb regulations, bad policy, and uncertainty are holding the economy back from its potential. But that's subjective and hard to measure>>

    Translation "so since I can't measure them, I'll pretend like their effects don't exist."

    I literally laughed when I read this article. Not in a good way, in a sad way.

    And just so I'm clear, what is metaphysical clarity? Metaphysics, as in the field of philosophy that proves that nothing is provable? If that's the case you certainly did a fantastic metaphysical job of proving that the government should be spending money to buoy employment.

  • Report this Comment On May 13, 2012, at 8:59 AM, purplepodium wrote:

    The analysis that leads to the conclusion that the loss of public section jobs is weakening the recession is somewhat instructive. Though, retaining these public sector jobs will require stimulus as state and local budget deficits balloon due to out of control spending and public sector pension costs. The big stimulus is coming soon when California, Illinois, Rhode Island and New York ask for a bailout from Uncle Sam after the next election. Obama won't flinch to keep those blue states from more red ink. Thank god the government will be able to save the states so the taxpayers won't have to.

  • Report this Comment On May 13, 2012, at 10:42 AM, TMFMorgan wrote:

    Nowhere did I say their effects don't exist. I specifically said they do. And if it wasn't clear enough, here it is again: they do.

  • Report this Comment On May 13, 2012, at 11:35 AM, Hanoch1 wrote:

    I have heard many commentators suggest that the employment situation is not really as bad as the numbers suggest because government workers have been fired. This strikes me as a faulty argument. Do the people who make this argument consider that, in reality, the government does not have the money to fund the salaries of these workers and it must, therefore, borrow to come up with the money? My personal economic situation can appear rosy on the surface too if I leverage up to the hilt and spend like wild. But that is not reality.

  • Report this Comment On May 13, 2012, at 12:13 PM, wolfman225 wrote:

    Morgan, I'll grant you that if government firings hadn't been occurring the unemployment rate would be much lower than it is now, as a completely abstract mathematical exercise.

    You are right that bad policies and over-regulation are factors in the slow recovery. However, I have a question about your assertion vis a vis government employment: Since ALL government jobs depend on private sector taxation, what would've been the effect on the economy of even greater amounts of revenue being taken out of the private sector, thus unavailable for business investment, expansion, and hiring?

    I think it crucial that the public sector shed unnecessary and unaffordable positions. Without lightening the load on the taxpaying sector, we'll quickly descend into a double-dip.

    I second the comments above about why it always seems to be teachers, police, fire, etc. that get the budgetary ax. Here's why: Progressives need a crisis to scare citizens into accepting high and ever-increasing tax loads. They use comments such as: "It's for the children", "Who's going to protect you at night?", and "What if you have an emergency or fire and 'Republican budget cuts' have closed your fire station?" They threaten layoffs in vital services because no one is worried about administrators and management being thinned. It's never any more complex than that.

  • Report this Comment On May 14, 2012, at 6:44 AM, devoish wrote:

    << Since ALL government jobs depend on private sector taxation, what would've been the effect on the economy of even greater amounts of revenue being taken out of the private sector, thus unavailable for business investment, expansion, and hiring?>>

    A wider distribution of wealth, as many Government employees can spend at many bagel stores, whereas one underpaid private sector employee spends less, and one overpaid private sector executive can only visit one bagel store each day.

    Tax money trickled down for as long as Government employees were well paid.

    <<I have heard many commentators suggest that the employment situation is not really as bad as the numbers suggest because government workers have been fired. This strikes me as a faulty argument. Do the people who make this argument consider that, in reality, the government does not have the money to fund the salaries of these workers and it must, therefore, borrow to come up with the money? >>

    It was foolish for Government to contractually obligate itself to spending and then cut the taxes and revenue it needed to fund those obligations and replace them with borrowing based upon economic theory.

    Best wishes,

    Steven

  • Report this Comment On May 14, 2012, at 10:06 AM, whereaminow wrote:

    Steven,

    More fat government employees eating bagels huh? Yes, that's what I want with my tax money. Thank goodness for a wider distribution of wealth.

    TMFMorgan,

    If you ever decide to leave the field of econometrics and enter into the field of economics, let me know. I can give you a few books to read.

    This is not science. This is not economics. This is some weird place called crankism.

    The USSR never had an unemployment problem. It never had a GDP problem (rose every year at 7% like clockwork).

    But it did have a problem matching production with consumer desires.

    That's because an economy is about people learning to serve one another voluntarily, not through the use of force.

    With a big enough gun, government can reduce unemployment to zero. But we'd all have a lot less to eat. Many of us would end up starving, just as many did under the Soviet Union.

    What kind of science ignores the nature of the thing it is attempting to study, while giving us useless "What if" games?

    We need to learn how to serve one another without coercion and violence. That's what a market is. That's what an economy is.

    David in Liberty

  • Report this Comment On May 14, 2012, at 10:39 AM, CluckChicken wrote:

    "Your response conveniently ignores the very current example I cited. With so many tax returns now being electronically filed, what about those who were previously entering the paper returns into the state's system? Why should they be retained over teachers in the classroom. Within education, the amout of administrative personel over the last 30 years has increased far more than the number of teachers in the classroom. Why should they be exempt?"

    I am not sure what you think State jobs are like or why you appear to think they are so different then private sector jobs. Like anywhere else State jobs are based on some ratio, a person can only handle so much work. If teaching works best with a 1:25 ratio and a tax auditor works best with a 1:15,000 ratio what makes you think that only the teachers are dealing with something like a 1:30, why can't the auditor be dealing with a 1:25,000?

    " I'm not aware of any state where, in the aggregate, total state employment did not expand as much or MORE than was necessary."

    I can speak for areas I know about for two States. In one while the number of employed did expand during the 90s and 00s it did not expand as much as it should have. I know my state tax auditors now handle about 15% more accounts then they did 10 years ago and my understanding is that they were already handling about 10% more then they should have then.

    The other State overal significantly increased the number of people working road planning during the 90s and 00s because the State government went from handling several thousand roads to only 3 and now the County governments handle the roads. This happened because the State government wanted to cut taxes and show that they could control spending during the good years.

    Work whether it is done for Apple, Dow, Ford, mom & pop hardware or the Government is still done by people. There is only so much work people can do before they become inefficent.

  • Report this Comment On May 14, 2012, at 11:18 AM, mdk0611 wrote:

    Once again you ignore the example I cite, perhaps intentionally. It had nothing to do with state tax auditors. And if fact, your ratio anaysis makes my case. With the significant increase in electronic filing of state tax returns the ratio of returns requiring input by state workers per worker HAD to have significantly decreased. To keep the ratio the same, the number of workers should have DECREASED. As opposed to cuts in teachers and police, why are their ranks not being thinned?

  • Report this Comment On May 14, 2012, at 1:12 PM, Darwood11 wrote:

    @purplepodium

    " Thank god the government will be able to save the states so the taxpayers won't have to."

    I think the taxpayers will ultimately pay for this.

  • Report this Comment On May 14, 2012, at 1:16 PM, Darwood11 wrote:

    Morgan;

    Good article.

    I wonder how many in the reduction of government ranks went into retirement? Or, went on unemployment until retirement?

    I have an opinion that the 1.4 million who were on 99 weeks of unemployment were in fact, government employees of a sorts. I do understand that not all states provide such generous benefits.

    The next wave will be the tens of thousands of servicemen and servicewomen returning from overseas. How will the state's deal with them?

  • Report this Comment On May 14, 2012, at 3:00 PM, CluckChicken wrote:

    "Once again you ignore the example I cite, perhaps intentionally. It had nothing to do with state tax auditors. And if fact, your ratio anaysis makes my case. With the significant increase in electronic filing of state tax returns the ratio of returns requiring input by state workers per worker HAD to have significantly decreased. To keep the ratio the same, the number of workers should have DECREASED. As opposed to cuts in teachers and police, why are their ranks not being thinned?"

    Ok how many people do you think do that? How do you know that they haven't been? What makes you think there were lots of people doing that to begin with? I know my state has been using the same tech that banks used for payments since at least the mid 90s as they purchased an old scanner from Chase when I worked for them.

  • Report this Comment On May 14, 2012, at 3:35 PM, devoish wrote:

    Hopelesslylost,

    You're become argumentative to a point well beyond idiocy.

    Austrian economics are unrealistic. Keynes economics are far better. Neither is proving very useful for dealing with the legalized robbery of employed Americans by the financial industry and you're politics of non intervention are why it happened.

    Best wishes,

    Steven

  • Report this Comment On May 14, 2012, at 3:57 PM, whereaminow wrote:

    "Austrian economics are unrealistic. Keynes economics are far better."

    Ah, a most brilliant statement. Bravo!

    David in Liberty

  • Report this Comment On May 14, 2012, at 8:26 PM, devoish wrote:

    David in the USA,

    Thank you. The rest of the post was better.

    "It does not require many words to speak the truth." - Chief Joseph

    Best wishes,

    Steven

  • Report this Comment On May 14, 2012, at 8:48 PM, whereaminow wrote:

    Since 1995, there have been 64,000 new federal regulations and 550 federal agencies to enforce them.

    http://cei.org/sites/default/files/Wayne%20Crews%20-%2010,00...

    Yes, "my politics of non-intervention" have sure caused quite a mess!

    David in Liberty

  • Report this Comment On May 14, 2012, at 9:18 PM, CommonScents wrote:

    Morgan,

    You've reached 'superstar' status in my mind.....I officially read everything you publish. Thanks for the great work!

  • Report this Comment On May 14, 2012, at 9:58 PM, CaptainWidget wrote:

    <<A wider distribution of wealth, as many Government employees can spend at many bagel stores, whereas one underpaid private sector employee spends less, and one overpaid private sector executive can only visit one bagel store each day.>>

    If only our economy ran on bagels! Then we could pass a law mandating everyone consume 5 extra bagels a day. Imagine how prosperous we could become!

  • Report this Comment On May 14, 2012, at 11:15 PM, devoish wrote:

    CaptainBrilliance,

    Nobody needs a law to buy bagels.

    David,

    Sometime regulations serve to make Government do less. You know, like "right to work" or "privatization".

    But it does require 64,000 new regulations to reduce the effectiveness of 64,000 better ones. Like Glass-Steagal for instance. Or privatizing what was a very well run and conservative lending institution in the 1970's.

    You are a politician of the worst sort, but that was a great talking point.

    Best wishes

    Steven

  • Report this Comment On May 14, 2012, at 11:29 PM, devoish wrote:

    64,000 new regulations since 1995.

    I wonder if any of them provide structure for the internet.

    I wonder if any of them concern genetic engineering

    I wonder if any of them told Eliot Spitzer he could not prosecute predatory lending.

    I wonder if any of them concern shale gas extraction technology.

    I wonder if 64,000 sounds like a lot, but really is just a talking point for tepid minds.

    Best wishes,

    Steven

  • Report this Comment On May 14, 2012, at 11:42 PM, whereaminow wrote:

    Steven,

    Let's review. I know how you like to change the subject after you've been caught (kinda like that whole FDR and gold confiscation thingy from last post.)

    You said:"you're politics of non intervention are why it happened."

    You didn't say: "my politics of intervention created all kinds of wonderful things."

    Steven, which is it?

    David in Liberty

  • Report this Comment On May 14, 2012, at 11:54 PM, CaptainWidget wrote:

    <<Nobody needs a law to buy bagels.>>

    Your level of ignorance about economics is astounding.

  • Report this Comment On May 15, 2012, at 7:02 AM, devoish wrote:

    David,

    You brought up the political talking point of the 64,000 regulations talking point in order to present Government as overbearing because you are a Republican mouthpiece, promoting the same political views.

    Don't be an apologist for the results of your politics. Political support of privatization such as the above attack on all regulation helps good regulation gets defeated and weakened to the point of being toothless.

    CaptainBrilliance,

    My understanding of Austrian economics is pretty good. The best any country guided by Austrian economics has ever done is support about 10% of a Countries population comfortably at the expense of the rest.

    Austrian economics runs hand in hand with the "small government" politics of the Republican/conservative/libertarian/whatever nameisnotdisgracedyet party and it is a tool for destroying Democracy, not building it.

    Like David once told me, Qatar is a nice free place to live. It is a "relatively free society" after it nationalized its oil industry and used that money to provide Social benefits within its borders like Norway did.

    But that is the result of neither Austrian economics nor "small Government" as he represented it to be.

    My understanding of economics says that if the United States government were to lower the retirement age to 55 and increase SS disability and retirement benefits unemployment would be solved.

    Unemployment used to be under 5%, basically everybody who could work did work. Today unemployment is closer to 10%. That means they earned some paid time off. The fact that it is unpaid time off is due to politics rewarding privatization and "wealth" at the expense of the people who actually did the work.

    My understanding of "free market theory" is that its supporters believe that a "free market" result is the best result because it is a "free market" result, regardless of how bad that result actually is.

    You all have made that pretty clear.

    Best wishes,

    Steven

  • Report this Comment On May 15, 2012, at 9:54 AM, whereaminow wrote:

    Steven,

    I don't know why the Fake Left/Right needs to be included in this discussion.

    Again, to review. You said that my politics of non-intervention caused this mess. Now you say:

    "Political support of privatization such as the above attack on all regulation helps good regulation gets defeated and weakened to the point of being toothless."

    So is your argument that although total regulation increased, because I oppose that regulation it has was not effective?

    David in Liberty

  • Report this Comment On May 15, 2012, at 11:30 AM, hbofbyu wrote:

    What's more important, jobs or productivity? It seems that the left feels jobs trump efficiency and productivity while the right says cut the waste and let's create real value.

    I can always elect a politician who will give me a job - even if it is just spreading the wealth around with inefficient programs.

    Spread it around enough to keep the peasants from revolting but not so much that the economy collapses like the Soviet Union.

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