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The real culprit in U.S. jobs crisis: Government cuts

A man holds his briefcase at a job fair in New York last month. The broad and deep decline in public hiring is a significant shift in the United States labour market.


Most U.S. states municipalities have balanced budget laws. What if they didn't?

Some might say a crisis in the muni bond market akin to the European debt crisis. Fair enough. But assume investors in state and local debt reasoned the states and local governments could run deficits and still make good on their bond payments. That scenario would have made for a very different recovery.

Mark McCormick, a currency strategist at Brown Brothers Harriman in New York, pointed out this week that the only reason the U.S. is enduring a "jobless" recovery is because of legislated austerity in state capitals. From the end of the recession in June 2009, state and local governments have cut more than 800,000 jobs. Private employers have created almost three million positions, including more than 200,000 in manufacturing, an industry that had been left for dead.

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"The takeaway is that the jobless recovery is due to the restructuring of state and local government jobs and the austerity that has forced budget cuts," Mr. McCormick said in a note for clients.

This broad and deep decline in public hiring is a significant shift in the United States labour market. According to Mr. McCormick, governments (including federal) created 1.3 million jobs during Bill Clinton's presidency and the first four years of George W. Bush's administration. If Barack Obama could count on that kind of boost from public hiring, he might not be sweating so much about November's presidential election. If government employment had stayed at Clinton-Bush levels, the U.S. unemployment would now be less than 7 per cent, Mr. McCormick said.

The good news is the rate of job losses in the public sector is easing. When the Labour Department releases its April jobs survey Friday morning, economists at Barclays reckon the report will show a decline of 10,000 government jobs from the previous month. That would be disappointing, but still less than December. Over the first three months of 2012, governments actually added a net four million positions.

Mr. McCormick's calculations highlight why Federal Reserve chairman Ben Bernanke is so adamant that Congress go easy on fiscal austerity.

The federal government isn't bound by any fiscal rules, and its debt level, while growing, still is manageable. Those who advocate caution on austerity tend to be characterized as proponents of more stimulus.

That's true of some. But others would simply like Congress to wait a year or two before implementing arbitrary budget cuts that would result in tens of thousands of pink slips.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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