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About one-third of the aid in the “stimulus” law is aimed at state and local governments. This allocation — largely intended to save the jobs of government employees, among other goals like providing more services for struggling families — vastly overstates the importance of state and local government in the national employment picture, and thereby diminishes the law’s potency as a stimulus to national employment.
If, as some of the experts say, it were the task of federal fiscal policy to put people back to work, you would think that stimulus spending would be allocated to the various sectors in rough proportion to the jobs that were lost, or might be lost.
Before this recession started, state and local government employment was only 14 percent of national employment and a lesser percentage of national payroll spending — far less than the one-third of the importance it was given in the stimulus law.
State and local governments are seeing declines in their revenues from income, sales and other taxes. Some of those governments have cut hours or the number of workdays for their employees. But lots of industries are seeing their revenues decline, and have reduced working hours, so these changes do not put state and local governments in a special position.
Although stimulus advocates insist that saving state and local government is the secret to an effective stimulus law, economists have known for a long time that state and local government employment is more stable than private-sector employment, even without special stimulus aid.
The chart above shows how, by the time the stimulus law was being debated this January, the private sector had lost four million jobs during this recession, whereas state and local government employment had grown by 124,000. (Since then, state and local government has lost 14,000 jobs –- for a cumulative gain of 110,000 jobs –- while the private sector lost another 2.9 million.)
In the average month, over two million private-sector employees were let go, as compared to 96,000 state and local government employees. Of course, that was bad news for 96,000 families of state and local government employees, but I see no economic reason why their suffering would count 20 times as much as the suffering resulting from the private-sector layoffs.
For these reasons, an effective stimulus law would have allocated state and local government something from 4 percent (its share of layoffs) to 14 percent (its share of employment) of its funds.
Economic analysis does not support the extraordinary importance afforded state and local governments by the stimulus law, but political analysis might. In particular, patronage jobs are an important part of the political participation machine. Perhaps when members of Congress were talking about “saving jobs” as they authored the stimulus law, they were talking about 535 specific jobs — their own!
[Added: Professor Tollison writes "[This] is called buying votes with the public purse. See Gavin Wright on New Deal spending and electoral votes, REStat, 1970's. Then, regress swing states in the last election on stimulus money to date."
I would love to see the results of that regression ... if anyone runs it, please post to the comments ... thanks.]
About one-third of the aid in the “stimulus” law is aimed at state and local governments. This allocation — largely intended to save the jobs of government employees, among other goals like providing more services for struggling families — vastly overstates the importance of state and local government in the national employment picture, and thereby diminishes the law’s potency as a stimulus to national employment.
If, as some of the experts say, it were the task of federal fiscal policy to put people back to work, you would think that stimulus spending would be allocated to the various sectors in rough proportion to the jobs that were lost, or might be lost.
Before this recession started, state and local government employment was only 14 percent of national employment and a lesser percentage of national payroll spending — far less than the one-third of the importance it was given in the stimulus law.
State and local governments are seeing declines in their revenues from income, sales and other taxes. Some of those governments have cut hours or the number of workdays for their employees. But lots of industries are seeing their revenues decline, and have reduced working hours, so these changes do not put state and local governments in a special position.
Although stimulus advocates insist that saving state and local government is the secret to an effective stimulus law, economists have known for a long time that state and local government employment is more stable than private-sector employment, even without special stimulus aid.
The chart above shows how, by the time the stimulus law was being debated this January, the private sector had lost four million jobs during this recession, whereas state and local government employment had grown by 124,000. (Since then, state and local government has lost 14,000 jobs –- for a cumulative gain of 110,000 jobs –- while the private sector lost another 2.9 million.)
In the average month, over two million private-sector employees were let go, as compared to 96,000 state and local government employees. Of course, that was bad news for 96,000 families of state and local government employees, but I see no economic reason why their suffering would count 20 times as much as the suffering resulting from the private-sector layoffs.
For these reasons, an effective stimulus law would have allocated state and local government something from 4 percent (its share of layoffs) to 14 percent (its share of employment) of its funds.
Economic analysis does not support the extraordinary importance afforded state and local governments by the stimulus law, but political analysis might. In particular, patronage jobs are an important part of the political participation machine. Perhaps when members of Congress were talking about “saving jobs” as they authored the stimulus law, they were talking about 535 specific jobs — their own!
[Added: Professor Tollison writes "[This] is called buying votes with the public purse. See Gavin Wright on New Deal spending and electoral votes, REStat, 1970's. Then, regress swing states in the last election on stimulus money to date."
I would love to see the results of that regression ... if anyone runs it, please post to the comments ... thanks.]
If, as some of the experts say, it were the task of federal fiscal policy to put people back to work, you would think that stimulus spending would be allocated to the various sectors in rough proportion to the jobs that were lost, or might be lost.
ReplyDeleteNo. The idea of the stimulus is to stimulate so money should flow into the hands of those who are most likely to spend it quickly. Of course it is nice if we can get something useful out of that but not necessary (see Keynes famous quote about burying banknotes in caves).
A chunk of the stimulus went into higher one-time payments to those on Social Security, higher food stamps and an extension of unemployment benefits. I would say that this more or less focused on those who lost or were losing jobs and was going to places where it would be spent quickly.
Another piece went to anyone with a job in the form of reduced payroll taxes. Granted this benefits people not directly hurt by the recession but it does tend to boost consumption spending accross the board so I'd say its a pretty good stimulus candidate.
Although stimulus advocates insist that saving state and local government is the secret to an effective stimulus law, economists have known for a long time that state and local government employment is more stable than private-sector employment, even without special stimulus aid.
The bulk of the state aid went in the form of Medicaid matching. This indirectly saved state and local gov't jobs in that they didn't have to choose between firing the police chief or kicking poor people out of the hospital emergancy room but I think it can be said to have initially targetted those hurt most by the recession and secondarily provided a floor to the economic pain accross the country. In the Great Depression the states ended up dragging the Federal stimulus by raising taxes and reducing spending to balance their budgets. The '50 little Hoover's' risk was avoided here (with all due respect to Hoover who wasn't the arch-budget balancer history has depicted him as)....