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Threat from mounting public job losses tested Obama's economic strategy

April 30, 2012
The Washington Post
By Zachary A. Goldfarb

As the economic recovery has struggled to pick up speed, one of the biggest stumbling blocks has been job losses in state and local governments, which have been on the rise for much of President Obama’s term.

Early on, Obama fought for aid that saved hundreds of thousands of these jobs, economists say. Yet a year later, when his economic advisers said another large round of aid was critical for the health of the economy, Obama declined to make it a key part of his agenda. His political advisers said such an effort would be fruitless. Republican opponents on Capitol Hill, including some who were glad to see the public sector shrink, were arguing that these jobs were not vital for the economy.

Today, as Obama seeks another term, the heavy job losses at the state and local level remain a significant economic concern. His response at different moments underscores how the president has sometimes fought hard against the political odds for policies he thinks crucial and at other times relented when the chances of success seemed low.

Since the beginning of his term, state and local governments have shed 611,000 employees — including 196,000 educators — according to government statistics. Unlike the recovery in private-sector employment that Obama and his reelection campaign often cite — with businesses adding 4 million jobs since hiring hit its low point in 2010 — the jobs crisis at the state and local level has continued throughout his term.

On Friday, new government data showed that economic growth slowed in the first three months of the year, in part because government at the local, state and federal level has been spending less money — money that could have fueled economic activity.

The state and local job losses are significant for several reasons, economists say. For one, these losses have a broad social impact. Laying off teachers means larger class sizes and fewer after-school programs, for example.

What’s more, federal aid can go directly to state and local governments to prevent job losses, a relatively effective way to sustain economic growth. (Tax cuts, by contrast, can lead indirectly to job growth if they increase the amount of money consumers spend.)

“The job losses at state and local governments is the most serious weight on the job market,” said Mark Zandi, chief economist at Moody’s Analytics, who has advised both parties.

But others have viewed the job losses differently, saying they help shrink excessive public payrolls.

“We’re not going to get this economy going by growing the government,” Senate Minority Leader Mitch McConnell (R-Ky.) said last year. “It’s the private sector that’s ultimately going to drive the recovery.”

Andrew Biggs, a scholar at the conservative American Enterprise Institute, said that nobody wants people to lose their jobs unnecessarily but that it was right for the federal government not to do more to save these positions, because state and local governments had become bloated.

“It strikes an emotional chord with people if we have teacher layoffs, but we have hired a great many teachers in the past several decades,” Biggs said. He added that the layoffs “ultimately get you closer to where you should be in terms of the size of the public-sector workforce.”

Top Obama administration officials say that they fought hard for additional aid to state and local governments and are proud of what they accomplished.

“We helped stave off a disaster, but do I wish we could have done more? Absolutely,” said Education Secretary Arne Duncan.

Former congressman David R. Obey (Wis.), who pushed for additional spending on states and localities as the Democratic chairman of the House Appropriations Committee, said the effort ran into wide resistance across Washington.

“It was Republicans but also some conservative Democrats, and the administration was skeptical that we could get enough support to make the fight worthwhile,” he said.

A wall in Congress

By the end of Obama’s first year in office, businesses were beginning to hire again. The unemployment rate had started to come down.

But White House economists were worried. State and local tax revenue had collapsed during the recession and was not recovering.

Obama had tried to address the problem in the 2009 stimulus bill by including more than $150 billion in aid to state and local governments to fill budget gaps.

But as his second year began, economic advisers told the president that state and local governments were still poised to lay off huge numbers of workers, posing one of the biggest threats to the burgeoning economic recovery. Independent analyses by an organization consulted by administration officials suggested that states and localities together still faced at least a $180 billion shortfall. Up to 900,000 jobs would be at risk.

Obama asked his legislative advisers if there was any chance Congress would step in if he made an all-out effort.

None, they responded. The politics were terrible.

Republicans had blasted the original stimulus program for failing to lower unemployment as much as the administration had predicted. Many Democrats, like Republicans, were worried about ways to limit government spending and slow borrowing, given rising voter concern about the debt. Other Democrats told the White House they had no interest in bailing out Republican governors who boasted of shrinking government and had criticized stimulus spending in the first place.

“In late ’09-’10, there was widespread agreement among the economic team that state fiscal relief . . . was pretty much at the top of the list in terms of effective stimulus,” said Peter Orszag, Obama’s budget director at the time. “From a political and legislative perspective, it was unfortunately at the bottom of the list.”

As the White House crafted its plan to boost the economy in the president's second year, Obama did not make additional aid a central element. Instead, he pressed for other proposals to drive growth, including some deemed gimmicky by some of his economic advisers — for instance, a small-business lending fund. (Others, such as a hiring tax credit, had more support.)

Lawmakers say the administration realized that more aid for states and localities was necessary — deep within the president’s budget was a proposal for $25 billion in more help — but was worried about pushing for it when Congress was demanding action to tame the debt.

“They were nervous,” said Rep. George Miller (Calif.), the top Democrat on the House Education and the Workforce Committee. “As much as they knew you had to engage in this kind of spending, as much as they knew you had to not let the economy ruin the education system, it’s a tough one when all the attention is on the deficit.”

The tide started to shift in the spring of 2010, when it became clear that without additional federal action, hundreds of thousands of teachers could lose their jobs. Obama publicly called for $50 billion in more aid. Republicans balked, but Obama ultimately succeeded at getting a little more than half that amount.

‘Long-term effects’

But the aid was insufficient to meet the needs of states and localities. In 2010 and 2011, they cut 457,000 jobs.

“Federal aid mitigated the harmful effects of the spending cuts in the early years of the budget crunch, but its expiration last year had a catastrophic effect,” said a report released this month by the left-leaning Center on Budget and Policy Priorities (CBPP).

The impact of the cuts was most visible in education, where states and localities cut 178,000 jobs. As a result, according to the American Association of School Administrators, many schools increased class size, eliminated summer programs, shortened the school week to four days or shut down altogether. Some states have cut funding for higher education in half.

Beyond education, dozens of states have cut funding for services for the elderly and disabled and for emergency service providers such as police and firefighters.

Experts worry that the cuts will have lasting effects.

“There’s a big body of research showing that a lot of the things that state and local governments spend their money on have long-term effects on the economy and society as a whole,” said Nicholas Johnson, vice president for state fiscal policy at CBPP. “Cutting school funding now can hurt the education of a future workforce.”

Moreover, job losses in state and local government hit a workforce that is disproportionately composed of women and minorities.

With the economy stagnant, Obama asked his advisers in August to assemble another plan to boost the economy. Independent economists and officials at the Federal Reserve agreed that local and state job cuts were holding back the recovery. But Obama’s team did not plan to include a proposal to address the problem.

When Obama asked why, his advisers answered that Congress would never agree to more aid.

But Obama instructed them to insert a $35 billion aid plan into the proposal anyway. In the fall he made a speech to a joint session of Congress, saying the layoffs of teachers were “unfair to our kids. It undermines their future and ours.” Then he went on a bus tour to promote the plan.

It went nowhere in Congress.

In the past few months, as the overall economic recovery has tried to pick up steam, states have stopped losing jobs and added a small number of positions. But economists say losses are likely to continue at the local level.

Jason Furman, a top White House economic adviser, said the administration is continuing to push for action — even if Congress will not go along.

“We’ve signed two rounds, and we’re pushing for a third round,” he said. The aid has been “substantial,” he added, “but still less than we wanted.”

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