Lagging Employment Levels in the United States – by William Comanor and Takahiro Miyao

Wharf labourers waiting to apply for jobs, November 1949 (Wikicommons)

Some people have called for smaller government, and recently, they have received their wish with a vengeance. However, it may not be the government sector they envisioned; and it may have different consequences than they anticipated. For the most part, smaller government has meant such things as fewer teachers and shorter hours at libraries and parks.

State and local governments have shed jobs faster than any other part of the economy. Since January 2009, the month that President Obama took office, through June 2012, total state and local government employment declined by 664,000 jobs, or by 3.4%. Indeed, this decline exceeded the aggregate decline in total non-farm employment of 479,000 jobs, which was only a fall of 0.4%. What happened was that the private sector gained jobs during these years, but not by enough to make up the difference.

We lost teachers and firemen and park rangers and such. It is not that our society does not need the services these workers provide but rather that these governments are strapped for funds and unwilling or unable to raise taxes sufficiently to pay for them. The issue is one of public finance rather than of aggregate economic activity.

This distinction is relevant because the simulative policies of both the Administration and the Federal Reserve have been directed at placing more funds in the hands of consumers and firms with the expectation they will spend much of it and thereby contribute to the incomes of those they are paying. In past recessionary cycles, such policies worked well because unemployment was primarily due to stagnant economic activates in the private sector. But this time, it is different; which may be the reason why conventional policies have not worked so well. What are needed instead are policies directed specifically to local government financing issues.

What distinguishes federal from state and local government finance is the way that deficits are financed. At the federal level, notes and bonds are written to cover all deficits, which can then be sold to the Federal Reserve if not to the public. Indeed, the monetization of government debt is a major function for all central banks. To be sure, that process can be inflationary, but only when the economy is running at or near full capacity.

At the state and local levels, there is no corresponding process. There is no FED which stands ready to buy their debt instruments. And to make matters worse, many state and local governments operate under the statutory requirement of a balanced budget. When tax revenues decline, as they always do during a recession, these governments are required to reduce expenditures correspondingly.

In large measure, that process is precisely what has occurred during the Great Recession of the past few years. Triggered by a deleveraging process in the private sector, tax revenues declined and state and local government layoffs began. However tax revenues did not return sufficiently to turn the employment process around. If there ever was a time to secure outside financing to support state and local government employment, that time is now.

In principle, there is no reason why the Federal Reserve cannot monetize state and local debt. It is no more inflationary than federal debt. The political pressures against raising sufficient taxes to cover government spending are no more intense there than at the federal level. When the economy is booming and employment levels are high, that is time for raising taxes and paying off debts, at all levels of government. But when the economy is depressed, that is the time for increased borrowing to counter the decline of private spending; at lower levels of government as well as in Washington. And the Federal Reserve has a role to play at all levels of government. It is a role that is particularly critical in the current circumstances where depressed employment levels are most pronounced at the local government level.

Of course, there are difficulties associated with extending the Federal Reserve’s reach to school districts and local governments. Prominent among them is determining how “moral hazard” problems can be contained so that only those outlays are made which confront their true costs. Such issues, however, are present for federal expenditures as much as for local ones. They are not different, and neither should be their financing. The Federal Reserve has an essential role to play in each.

William S. Comanor is Professor of Economics at the University of California, Santa Barbara (UCSB), and also Professor of Health Services in the UCLA School of Public Health.  He has authored and edited 5 books and over 100 professional articles in economics, including ‘The Law and Economics of Child Support Payments‘. He was designated a Distinguished Fellow of the Industrial Organization Society in 2003.

In addition to his academic positions, Dr. Comanor served as Special Economic Assistant to the head of the Antitrust Division, U.S. Department of Justice in 1965-66, and also as Chief Economist and Director of the Bureau of Economics, U.S. Federal Trade Commission from 1978 to 1980.

Takahiro Miyao is Emeritus Professor at the University of Tsukuba, Japan, and Visiting Professor of Economics at University of Southern California (USC). He also teaches at Akita International University, Japan. After receiving Ph.D. in Economics at MIT, he has taught at the University of Toronto, USCB, and USC, and authored a number of books and articles in Urban, Regional, and International Economics. 

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