There has been an outpouring of moral and political objections to the recent wave of attacks on government employees and the supposed “necessity” of slashing “out-of-control” state budgets. These objections are, of course, inspiring and sorely needed. It is toward this end that I would like to offer a couple of serious economic objections to what I believe is a weak attempt on the part of free-market conservatives to substitute ideology for reality.
It is important to understand, first, the economic logic which lies at the heart of the conservative argument for working toward a balanced budget. For them, laying off state workers as a means of “getting the economy back on track” presupposes that, since government expenses will be lowered, taxes could then be lowered, thereby freeing up money in the private sector. This newly freed money, they argue, will be used for investment to create jobs and spur strong economic growth.
The first fundamental deceit is that laying off those workers might very well lead to a balanced budget at current tax levels, but in order to lower taxes, state governments would have to unbalance the budget the other way – that is, lay off so many workers and cut services so drastically that, at current tax levels, the government would actually be on track to generate a surplus. Only then could taxes be lowered so as not to generate a deficit. This simple logic was similarly ignored in the early years of the Bush administration, when, with the federal government roughly on track to end up spending as much as it was taking in (as evidenced by the repeated surpluses during the final years of the Clinton administration), the administration decided to substantially cut taxes and increase spending at the same time. This, unsurprisingly, led to massive deficits.
It should be understood that, except in the rare event of an economic boom, lowering taxes when a budget is balanced will almost certainly generate a deficit, simply because revenues begin falling short of expenditures. Yet, conservatives across the country are screaming for lower taxes and lower deficits at the same time, cleverly pretending as though these two goals are not inextricably at odds with one another. It also follows from this pitiful posturing that they can speak of federal and state deficits as though there weren't a massive shortfall in government revenues at the onset of the recession. (This shortfall, by the way, was indeed massive: as economists Robert Pollin and Jeffrey Thompson write, state tax revenues were, in 2009, 13 percent short of where they were in 2007. When this shortfall was combined with more unemployed people filing for state assistance, states saw an average budget gap of 21 percent between 2009 and 2011.)
Instead, conservative politicians propagate their second fundamental deceit: they conveniently pretend that spending has been the issue all along, which is, of course, perfectly consistent with their free-market (a k a “small government”) ideology. For example, the infamous “tax compromise,” which Republicans fought for so intransigently late last year, reduced tax revenues and sharply increased the projected deficit. Do they, therefore, acknowledge that they have been complicit in generating government deficits? Of course not, since all deficits are purely the result of “wasteful spending on welfare abusers, lazy teachers and, of course, those greedy government employees.”
But if laying off government employees is supposed to translate into lower unemployment and economic growth, then we might expect New Jersey, for instance, with its Tea Party superstar, Governor Chris Christie, to be creating jobs at a quick speed. And yet, after more than a year in office, Christie's state still suffers from over nine percent unemployment. Indeed, the Commerce Department recently had to revise its estimates of fourth quarter growth in 2010, in large part because of sharper-than-expected contractions in state and local government spending. Now, to be clear, there are many variables that can keep unemployment levels high – but the point is that laying off thousands of state employees makes reducing unemployment harder, not easier.
If conservatives get their way, we could have hundreds of thousands (if not millions) of newly unemployed people. The key question is: how long will it take for the newly freed money to create enough private sector jobs to absorb all these workers? The truth is that no one knows – no one could possibly know. This is the brazen conservative gamble that is currently posing as economic common sense. What conservatives routinely fail to acknowledge is the simple fact that each worker is at the same time a consumer. Get rid of a worker, and you get rid of a consumer. And if the private sector cannot create jobs fast enough to absorb these workers, then we end up with higher unemployment, lower consumption and, at least for a good while, slower economic growth.
To be fair, there are some conservative economists who will dutifully admit, as Alan Viard of the conservative think tank American Enterprise Institute did recently, that, “in the short run, a reduction in federal spending is likely to reduce GDP [gross domestic product] to some extent.” But by and large, the conservative legislators, governors and presidential hopefuls around the country keep this basic economic fact concealed in the interest of political gain.
I disagree strongly with the conservative, free-market logic for a multitude of reasons, but I can respect it when it is communicated honestly and in a forthcoming manner. If you believe that government spending levels must be reduced, fine, but don't pretend that the deficits are the results of government spending and not tax cuts combined with massive revenue shortfalls. If you believe that a smaller government is needed for a more prosperous economy, fine, but don't pretend that laying off government employees is going to translate into any perceivable economic gains in the short term.