Once Again: What Austerity?

Kevin Drum laments a policy of “austerity”:

This is the price of austerity. If public sector employment had been growing normally during this period, we’d have about a million more jobs than we do now and the unemployment rate would probably be below 6 percent.

echoing a theme that writers more eminent than he including Paul Krugman, Joseph Stiglitz, and Dean Baker have sounded from time to time over the last several years.

Before I react to that, let me provide a few definitions. By “employment” I mean the total number of full-time and part-time employees. By “payroll” I mean the total wages paid to employees. Now let’s go back to the graph of total government employment in Kevin’s post.

The graph shows steady increases in private sector employment, a spike in government employment in 2010 coincident with the bulk of the spending in the ARRA, the stimulus package, and a slight decline since then. There are several interesting things about that. First, there’s no sign of technological unemployment in that chart. Second, there’s no spike in private employment associated with the stimulus package. There’s the cyclical decrease in private sector employment associated with the recession and an increase associated with the recovery but the private sector effects of the stimulus if any were indirect. That’s consistent with some criticisms that have been leveled against the ARRA: that most of it went to bolster public sector employment and payroll and too little filtered into the private sector economy.

My best efforts have suggested to me that public sector payrolls (see here) after the recession have either held steady or increased slightly. How do you reconcile declining employment with constant or increasing payrolls? I would suggest that in state and local governments in particular revenues have not increased but labor contracts stipulating pay increases have left state and local governments with no alternative but to cut the number of employees. In the absence either of more revenue or wage flexibility what alternative do state and local governments have?

For the federal government the situation is slightly different. Wages have risen slightly while employment, other than the spike associated with the stimulus package and the temporary increase due to the census, has remained pretty constant.

None of the foregoing takes into account total public employee compensation, the bulk of which is in the form of healthcare and education benefits both of which have increased sharply over the last several years but which are very hard to nail down, or whatever public sector employment has been offset by private sector “contractors”.

Consequently, it would seem to me that Kevin’s actual complaints are that public employee pay has risen unrealistically when compared with revenues and state and local governments don’t have enough flexibility in employee compensation to adjust to changing times and instead trim the number of employees, aggravating an already difficult situation.

18 comments… add one

  • ...

    Last time I checked, one million more jobs would still leave us below the previous peak in employment.

  • I don’t know that I have the solution to that in hand but it seems to me that if you think the problem is not enough private sector employment, taking money out of the private sector (as was done when they ended the payroll tax “holiday”) is a strange way of going about it. If you think the problem is not enough public sector employment, increasing the wage levels of public sector employees so that you’re forced either to a) take money out of the private sector or b) lay off public sector employees is a strange way of going about that.

  • Ben Wolf

    Second, there’s no spike in private employment associated with the stimulus package.

    Did you expect to see one?

  • No, I didn’t. But you would think that a properly timed and structured stimulus would have more impact.

    More than anything I think it illustrates that the ARRA was structured to reward important political constituencies. Full stop.

  • Ben Wolf

    Depends on one’s definition of “proper”. The President made clear at the time any stimulus was intended to act solely to cushion or slow the contraction, not to correct or reverse it. He has amply demonstrated his commitment to soft liquidationism a la Herbert Hoover rather than full employment equilibrium as recommended by Keynes.

    Despite Democrats who insist on defending him by claiming it was all he could get, the record shows the ARRA was exactly what he intended at the time. The man was taking economic advice from Timothy Geithner (who knew almost nothing about macroeconomics) and ignoring actual macroeconomists telling him a very different story.

  • Red Barchetta

    Tsk. Tsk. You guys. Its all the intransigent Republicans fault. Otherwise the unemployment rate would surely be zero, wages would be rising briskly, Global Warming fixed, and ObamaCare would have found the cure for cancer.

    I say prosecute them for crimes against humanity.

  • steve

    Why are you concentrating solely on public payrolls? Total state and local spending slowed down quite a bit from trend. To be sure I would agree that sticky wages have been a problem, but I am having trouble pulling it out of your data to see how much of a problem. At least initially, contracts in place would have made it hard to stop increases. By now we should have seent effects of the recession and smaller or no increases.

    http://research.stlouisfed.org/fred2/series/W079RCQ027SBEA

    Also, I think Ben has it right. The stimulus stopped the slide. It was never enough to put us back to full employment. As I have said, I am not sure we could have afforded that anyway. Thanks to years of cutting taxes and not cutting spending (this is known as fiscal conservatism) we began the crisis with higher debt levels than we had with the great Depression.

    Steve

  • Why are you concentrating solely on public payrolls?

    Because public employment was the measure that Kevin Drum used as a way of measuring austerity.

  • The stimulus stopped the slide.

    I don’t think so. I think what occurred was just an ordinary cyclic recovery. Considering how little of the money had been spent (essentially, none) by the time that the recovery began, I think that the case you’re trying to make is an extremely difficult one. You’ve got to relate actual spending to changes in employment and I just don’t see that. Either that or you’ve got to claim that just appropriating the money was enough to goose the economy into recovery.

    If that were the case, it would provide an innovative strategy for economic growth: just appropriate a lot of money and never actually disburse any.

    What I think actually happened is that the preponderance of spending went to those in the top three income deciles and it was largely saved or not spent in the U. S.

  • steve

    1) Dont believe in trickle down? Since 1/3 went to tax cuts, that went mostly to higher earners. About 1/3 went to states in blocks, which should, according to some theories, lead to more efficient allocation of funding.

    2) I hire based upon forward projections, though based upon past experience. I suspect many others do also.

    3) I should add that I dont think the stimulus acted alone. The actions that resulted in unfreezing credit markets played a role too. I think the stimulus helped stop the firing frenzy. This is different than creating growth.

    4) Yes, that is how Kevin defined it, but is that how you would define it? I would look at total spending. Why is that a bad metric?

    Steve

  • 1) by most economists’ reckoning tax cuts for the highest income earners is an inferior kind of fiscal stimulus. I think it’s been shown pretty decisively that the sums that went to the states were used on projects that had already been approved prior to the passage of the stimulus. The effect was just to move money from one pocket to another rather than producing additional stimulus.

    3) I think at least a component of the “firing frenzy” was opportunistic. I said so at the time.

    4) Not every post is about everything. I’m not as interested in GDP (for example) as I am in employment. As to how I would define “austerity”, I find it hard to consider any policy under which spending increases in real terms as austerity. As I see it the problem is not just how much is spent but how it is spent.

  • TastyBits

    @Ben Wolf

    … Timothy Geithner (who knew almost nothing about macroeconomics) …

    You are too kind. Timothy Geithner is a complete idiot, and a tool of the Financial industry. He did everything he could to keep the mortgage party going, and he worked as hard as he could to get the fat cats their bonuses back.

  • jan

    “Its all the intransigent Republicans fault. “

    Drew,

    The clarion-call of this administration, since 2009, has been to look backwards, at Obama’s predecessor and his party, for the etiology of their own under-performing policies or failed goals shadow-boxing the democrats for five plus years. In this way they don’t have to be accountable for, analyze or even address aspects that aren’t working. Instead, they mitigate the political implications of their bad decisions, or simply dump undesirable results and negative endgames elsewhere, while separating out glorious moments, such as killing OBL, as a singular feat of their own making.

    It’s akin to a Hollywood movie, where elements of the script are moved around at will, in order to achieve the effect wanted in the writer’s creative mind. In the case of politics, we are currently witnessing an administration molding an amazing failsafe, aggressive agenda, constructed with fictional underpinnings that so far have been bought by those finding their way and counted at the ballot box.

  • TastyBits

    @Drew

    You might have noticed @steve’s 02/09/2014 08:48AM (central) comment had a line about tax cuts and the Great Depression. This is a variation on a theme I took up with another commenter a fews back.

    Basically, they are trying to establish Bush, Republican, and conservative ideas as the problem. I would suggest that you, @jan, and any other right folks crush this narrative as soon as possible. Let us see if you can do better.

  • steve

    @jan- Easily trumped by the lack of GOP politician, even one, noting that their policies helped get us into trouble. Since I dont think there really is much govt can do about this kind of crisis (ie create jobs), I dont think it mattered so much who ran the domestic economy. However, no one who advised W on getting us into Iraq should ever be allowed near the WH again.

    Steve

  • jan

    ‘You might have noticed @steve’s 02/09/2014 08:48AM (central) comment had a line about tax cuts and the Great Depression.”

    I’m assuming this is what you are referencing, Tasty:

    “Thanks to years of cutting taxes and not cutting spending (this is known as fiscal conservatism) we began the crisis with higher debt levels than we had with the great Depression.”

    From my POV. there is nothing to “crush.” Bush may have identified with being a conservative, but he often did not employ their tenets in formulating fiscal policies. IOW, many (not all) of GWB’s policies were flawed, especially dealing with spending. In fact, he was roundly criticized by the conservative faction of the party for “spending like a drunken sailor” — a phrase I recall being frequently used to describe Bush, by other republicans, especially during his 2nd term in office.

    That being said, I think Obama is only upping the ante of spending, surveillance, debt accumulation, abuse of executive power etc. — all things he railed against as Candidate Obama, but is now participating in himself, with even greater zeal, than his predecessor, once he achieved the position of POTUS.

    My own thinking revolves around wanting a government body who is more circumspect and serious about creating long term monetary policy that is less geared to appeasing constituencies, winning the next election, and the deployment of pure party ideology. Most non-ideological economists agree that printing money, loading up with unsustainable dependency/entitlement programs, and allowing a debt to bloom in unchartered territory does not bode well for the financial health of any country. Nonetheless, no party seems to venture near any viable, non-politically rewarded solution that might make a real positive impact on moderating the road to fiscal insolvency, followed by the social chaos/deprivations which would surely follow — and this includes the current and past R & D administrations.

  • jan

    “However, no one who advised W on getting us into Iraq should ever be allowed near the WH again.”

    Steve, very much how you laid causation for our economic problems at the doorstep of both R & D previous administrations, it stands to reason to do the same for the precursors leading up to the Iraq War.

    Clinton’s administration had access and opportunity to quell a precipitating factor in his second term — addressing OBL when he was simply a terrorist agitator, well before 9/11 happened. He ignored such opportunities, perhaps because of being too distracted by other problems.

    Nonetheless, Clinton’s CIA Director, George Tenet, became Bush’s DCI, as well as one of the major players in laying ground work and assuring GWB’s administration that intelligence reports showed “slam dunk” evidence of WMD’s in Iraq. This then led to the infamous Powell speech, and giving the Iraq invasion a sense of immediacy, credibility and thus majority support from Congress and the people. Of course with fewer on-the-ground intelligence assets — something that Clinton did away with — much of that intelligence was through satellite information and collaborating UK intelligence. Whatever the back story was, though, in the faulty WMD assessment, it is less clear that an actual “lie’ was deliberately perpetrated, than was evidenced in the more recent Benghazi tragedy, where intelligence was immediately gleaned, passed on to General Ham and then Secretary of Defense Penetta denoting the incident to definitely be a terrorist attack — not as a result of a spontaneous demonstration or by-product of a video. It is further hard to believe that the POTUS, as well as SOS Clinton, were not immediately informed of this conclusion the evening it happened, making their disengagement and continuing hazy, misleading handling of the Benghazi incident suspect and basically a lie, rather than an innocent fog of war mistake — especially with an election on the line only months away.

    So, I would extend your remarks, regarding those being on the list to stay away from the WH, to include the liars in this administration, which would be the democratic front-runner for 2016, Hillary Clinton, as well.

  • TastyBits

    @jan

    Several threads @Zachriel was making the argument that because of the Bush tax cuts when the housing crisis came there was no money to do anything about it, and therefore, the Bush tax cuts, Republican policies, conservative values caused the financial crisis. The @Zachriel(s) would need to clarify, but I think this is the gist.

    I suspect that this is what @steve is getting at, and I am guessing it is the latest line of defense against a non-performing economy. If I am correct, this is only a piece of a larger structure.

    If you did not follow the thread between @Zachriel(s) and myself, I would suggest you go back and study it. I was only getting warmed up, and I had two or three other areas I thought they would attack.

    I have become rather bored, and my arguments are far too “centrist” for conservatives. Therefore, I suggest the true conservatives do battle. I will give you a hint that this is well beyond any President Bush’s spending. They will let you flail around with this while removing the ground under you.

    Bubbles are credit phenomena, and as such, credit is where the problem and solution reside. The assets supporting the credit collapsed – became worth less or worthless, and any financial instrument leveraged off of this credit collapsed. In addition, anything leveraged off the leveraged instruments collapsed also collapsed.

    In 2008, TARP was meant to stabilize tens of trillions of dollars of credit and leveraged financial instruments. More than likely, Secretary Hank Paulson knew within minutes of learning about the run on the money market funds what it meant.

    When you see things like debt levels, Great Depression, MBS’s not regulated, shadow banking system, Dodd-Frank, housing crisis, financial crisis, Bush tax cuts, and a few others being strung together, it would be advisable to know how the underlying structure works.

    Trying to counter it with the CRA, tax cuts help the economy, or any other pablum is going to work as well as it has been, but good luck.

    To anybody who wants to dispute my above narrative, I am bored. You can put forth a differing position, and if your political opponents want to dispute you, argue with them.

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