Friday, January 11, 2013

Why U.S. spending cuts won’t kill too many jobs

The U.S. began the year with an awkwardly arranged deal that raised taxes. I hope it doesn’t end the year without a deal to limit spending.

The U.K. may have embraced austerity too soon, but the U.S. is far enough along in its recovery that it can begin balancing its books. An impressive new series of papers has estimated the impact of public spending on jobs during the recession, and concluded that we can make moderate budget cuts without sending the economy into a tailspin.

In the long run, the labor market will be able to adjust to less government spending, but in the short run, reductions in spending will mean fewer jobs. Last week’s figures from the Bureau of Labor Statistics showed that the unemployment rate was steady at 7.8 percent and that the U.S. private sector added 1.9 million jobs last year. Those numbers are healthy enough for us to contemplate cutting spending now. Before deciding, however, we should understand what cuts will do to employment in the short run.

How do economists estimate the impact of changes in government spending on jobs and joblessness? There is a long tradition of predicting how government spending will affect overall employment. One approach is to focus on the time pattern of jobs and spending at the national level. It is pretty hard to get much that is definitive, however, because the U.S. economy as a whole has so many moving parts.

Therefore, researchers have increasingly turned to state-by-state comparisons. Some of our best estimates of the impact of spending on employment come from recent studies comparing the experiences of various states under the American Recovery and Reinvestment Act of 2009 -- the federal stimulus program. These findings help us assess how quickly we can cut spending.

Researchers found an even stronger connection between spending and employment when they looked at month-to-month changes in stimulus spending and state-level employment. (In this case, they had no special third variable, but they could control for the average level of employment in the state over the same time period.)

The data showed that an extra $100,000 in a month creates slightly more than 3.2 jobs, but “this indicates a cost of about $300,000 per job over the course of a year for this subset of spending.” They also looked at whether job growth persists after the stimulus and found little evidence for that.

Some categories of stimulus spending were more effective than others in creating jobs. Funding for transportation and aid supporting those with low incomes had a relatively large effect on jobs. But providing money for local governments, especially through education support, does little for state employment. (Maybe the states that received less money didn’t actually fire their teachers, or maybe the dismissed teachers found work elsewhere.)

If we cut only $50 billion, this should mean 400,000 fewer jobs, and possibly less if the effect of public spending on employment is weaker today than it was during the recession. That’s a serious loss, but if private-sector job creation continues at its current annual rate of 1.9 million a year, private-sector growth could offset that loss in less than three months. Bloomberg

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