What If the Government Didn't Cut Jobs?

It's election season, and the economy is weak. That's a breeding ground for accusations that the government is responsible for the weakness -- particularly the high unemployment rate.

And it's true. Governments are responsible for a lot of today's high unemployment. But maybe not in the way most consider.

Sure, dumb regulations, bad policy, and uncertainty are holding the economy back from its potential. But that's subjective and hard to measure. What we can measure is how much state, local, and federal job cuts have added to the unemployment rate over the last few years. And those numbers might surprise you.

Since 2009, the private economy has created 1.3 million jobs, and governments have shed 1.3 million jobs, according to the Bureau of Labor Statistics' household survey. Justin Lahart of TheWall Street Journal used that data yesterday to ask: What would the unemployment rate be today if governments hadn't been slashing jobs over the last 3.5 years?

His rough conclusion (emphasis mine): "If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%."

That got me thinking. Not only have there been large government job losses over the last 3.5 years, but most periods over the last several decades have experienced a large rise in government jobs. A recent example: The government sector added 1.5 million jobs from 2002 to 2006. Between 1950 and 2008, government employment increased by an average of 286,000 jobs per year, with a fairly steady growth rate. If we had that kind of growth in government employment over the last few years, our unemployment rate would be far lower than it is today.

So what if, rather than holding government employment steady at December 2008 levels as Lahart does, you assume that it grew at the same rate from 2009-2012 as it did from 2005-2008? You get this:


Source: Bureau of Labor Statistics. Y-axis doesn't start at zero to better show change.

A current unemployment rate of... drumroll... 6.5%.

Now, I'm not usually a fan of these alternate histories. You can prove anything if you suspend reality and assume what you want.

And this isn't necessarily a criticism of government job cuts. Most recent cuts occurred at the state and local level, where lawmakers had generally become addicted to booming tax revenue from the housing bubble and expanded far beyond what they could afford. Since most state and local governments have to balance their budgets yearly, there's little they can do now other than tighten the ol' belt. The last thing the country needs is fewer teachers and police officers, but there's also a stubborn need to obey the laws of budget arithmetic. John Maynard Keynes said, "The boom, not the slump, is the right time for austerity." State and local governments have done just the opposite.

So why bring this up? Because too many debates about jobs and budgets these days forget basic facts:

  • Government cuts are masking a private-sector rebound that is stronger than most give it credit for. Private businesses have created a respectable number of jobs in recent years. Not enough, but government jobs cuts have turned what would otherwise be a slow recovery into an awful one. The S&P 500 (INDEX: ^GSPC) and Dow (INDEX: ^DJI) fell on Friday after the monthly jobs report came in below expectations. The report would have exceeded expectations if readings of previous months' government jobs hadn't been revised lower.

  • Austerity may be necessary at some point and at some levels, but it doesn't occur in a vacuum. Make big cuts to government spending, and big job losses follow. As investing great Jeff Gundlach said last week, "It is metaphysically clear that if we attack the deficit, the economy will go negative."

What do you think? Sound off in the comment section below.

At the time thisarticle was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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