Edward Glaeser on the Labor Market Impact of Fiscal Consolidation

by Reihan Salam

Drawing on the work of Bruce Sacerdote and James Feyrer of Dartmouth College, who exploit interregional differences in the amount of stimulus dollars per capita and the seniority of congressional delegations to evaluate the impact of fiscal stimulus on employment levels, and Sylvain Leduc and Daniel Wilson of the Federal Reserve Bank of San Francisco, who focus on transportation spending, Edward Glaeser concludes that the U.S. labor market can withstand modest near-term cuts in federal expenditures:

There is something of a consensus that federal dollars do more to affect jobs during the depths of a recession, which is why the recovery makes it easier for us to contemplate spending cuts. If we start with Wilson’s $125,000-per-job number seriously, this means that reducing annual government spending by $125 billion would mean somewhat less than one million fewer jobs, at least in the short run. That is a considerable figure and probably more than the U.S. would feel comfortable losing right now.

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.

I tend to think that policymakers should focus on changing the incentives embedded in spending initiatives, e.g., embracing competitive bidding in Medicare and facilitating the repair of household balance sheets through more targeted deployment of savings incentives, as this approach is designed to generate savings over time and, ideally, to reduce the demand for public services. The problem is that such potential savings are difficult to score, and so they tend to be neglected in the budget process. But Glaeser makes a good case for trimming expenditures in a more straightforward way in the near term.