The Federal Reserve Board now believes U.S. unemployment can reach the central bank's 6.5-per-cent policy threshold next year, earlier than previously thought. The growing optimism is heartening. But there's an argument that the jobless rate should already be there – if only the government had acted as it normally does coming out of a recession.
Researchers Michael Greenstone and Adam Looney of the Hamilton Project – a left-leaning Washington economic think tank – argue that the austerity kick at local, state and federal government has sapped the U.S. economy of jobs at a point in the economic cycle where, typically, governments are creating jobs. Since the end of the recession in mid-2009, public sector employment has shrunk by more than half a million. The ratio of government employment to total U.S. civilian population has sunk to its lowest level in nearly 50 years.
"There are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions," they wrote in a recent report.
Let's do some quick math. There were 11.8 million unemployed people in the U.S. labour market in May, or 7.6 per cent of the 155.7 million total labour force. If you take 2.2 million of those people and place them in those "missing" government jobs, you would only have 9.6 million unemployed people – an unemployment rate of 6.2 per cent of that labour force.
Of course, all that additional hiring could very well have brought more people back into the labour force, so the back-of-the-envelope calculation may underestimate the unemployment rate a bit, but you get the point. The U.S. economy would have considerably more consumer juice in it, and the Fed would probably be having internal conversations about the need to raise its policy interest rate at least a year ahead of its current schedule.
Given the extraordinary depth of the recession and the massive toll it took on the labour market, one could easily argue that governments needed to do more than usual to contribute to job creation and accelerate the recovery – not less. But the U.S. political push toward cutting spending and reining in budget deficits – culminating in the so-called "sequestration" across-the-board cuts gripping Washington this year – has taken governments far away from their traditional role in the labour market recovery.
"Such a large contraction of the public sector during a recovery is unprecedented in recent American economic history," Mr. Greenstone and Mr. Looney wrote. "By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labour market recovery."
And the trend looks likely to continue. The researchers noted that according to Congressional Budget Office estimates, sequestration will reduce U.S. GDP growth by about 0.6 percentage points this year, and will result in about 750,000 fewer jobs in the U.S. economy. (To be fair, those aren't just government jobs. Those represent all jobs – public and private sector – that will be lost or not created as a result of the combination of direct spending cuts and the resultant slower economic activity.)
"Policy makers are currently faced with the unenviable task of simultaneously increasing employment and addressing America's long-term budget deficits," Mr. Greenstone and Mr. Looney said. "But at a time when the rate of government employment is at a historic low, sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America's jobs gap."