710000 Jobs Endangered By Massive State Deficits So Be It

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The general reaction to last week’s jobs report was positive toward the 222,000 private sector jobs that were created and dismissive of the fact that nearly 14 percent of those job gains were negated by job losses in state and local government.

Now there are new indications that the drag on the economy from state and local job losses is about to get much worse. The Center for Budget and Policy Priorities is now estimating that 710,000 state government jobs could be lost in the upcoming fiscal year as they attempt to close massive deficits. That’s on top of as many as 700,000 jobs that some economists say would be lost if the federal budget cuts being pushed by House conservatives would go into effect.

That’s why we need to call on Congress to increase, not cut, federal aid to the states.

The center today updated its projections for state budget deficits. “The upcoming fiscal year (2012, which starts in most states July 1) is shaping up as one of states’ most difficult budget years on record,” the report says. “Thus far, some 44 states and the District of Columbia are projecting budget shortfalls totaling $112 billion for fiscal year 2012.”

The deficits are symptomatic of a cycle that is sending state governments into a death spiral that many states cannot seem to break on their own. From the report:

Unemployment remains around 9 percent, and many economists expect it to remain at high levels throughout 2011 and beyond. Continued sluggish job growth will keep state income tax receipts at low levels and increase demand for Medicaid and other essential services that states provide. High unemployment and economic uncertainty, combined with households’ diminished wealth due to fallen property values, will continue to depress consumption; thus, sales tax receipts also will remain low. These factors suggest that state budget gaps will continue to be significantly larger than in the last recession, and last longer.

The spending cuts that state and local elected officials are choosing to do are only destined to make things worse.

Spending cuts are problematic during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.

CBPP based its 710,000 job-loss estimate by calculating that a $106 billion shortfall that states are facing for fiscal year 2012, after taking federal assistance into account, would equal about 0.71 percent of GDP. “Assuming that economic activity declines by one dollar for every dollar that states cut spending or raise taxes, and based on a rule of thumb that a one percentage point loss of GDP costs the economy 1 million jobs, state shortfalls could cost the economy 710,000 jobs next year,” the report said.

This year states are collectively trying to close a budget hole even larger than the one they face, $130 billion. So far, since July 1 they’ve done it by shedding 13,000 state workers. An additional 152,000 local government workers have also been let go.

But those comparatively limited losses are in the context of $59 billion in Recovery Act funds that will be going to the states this fiscal year. However, only about $6 billion in Recovery Act dollars are slated to flow into state and local coffers after June 30.

A program similar to the federal revenue sharing program that existed in the 1970s and early 1980s would mitigate what would otherwise be a disaster for the unemployed in thousands of communities. The concept is simple: Use the power of the federal government to raise and distribute revenue to states as they need to protect vital services and keep people employed. Lower-income communities received a proportionally larger share of the funds.

In its final year, $4.5 billion in revenue sharing funds—less than $10 billion in 2010 dollars—went to 39,000 communities. The program, however, was a favorite conservative target, and the Reagan administration finally killed it off. The New York Times reported at the time that the cutoff “caused a severe financial crisis in small and medium-size cities around the country and is forcing larger cities to make hard choices between cutting services and raising taxes.”

Revenue sharing was replaced by a series of block grant programs, most of which the right now wants to cut as well. Meanwhile the cuts at the state and local level are already mounting. A small sampling:

  • The Camden, New Jersey city government was forced to lay off nearly half of the city police force in an effort to come up with money cut by the state for local aid.
  • New Haven, Connecticut laid off 16 of its police officers.
  • The Costa Mesa, California city council voted March 1 to lay off 203 city workers to cover a $1.4 million deficit this year and to help pay the city’s $15 million annual tab for pensions.

In the mindset of the conservative leadership in Congress, all this deserves is a “so be it” response. Government must shrink, regardless of the consequences to people and to communities—as long as the ability of corporate interests to plunder the remains of the middle class and the poor remains intact.

The idea of restoring some form of revenue sharing may not be in the political book of either party, but that should not stop us from advocating it—especially in the midst of a historic jobs emergency.

Joshua Ney contributed to this post.


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