The Corner

Private Sector Doing Fine, Despite Government Shrinkage

Today’s jobs report, as Bob Stein described below, had all-around pretty good news about the U.S. labor market. According to the establishment survey, the economy added 236,000 jobs in February, with 246,000 actually added by the private sector, while the government shed 10,000 jbos. There are definitely some reasons to worry about our employment picture — for instance, the labor-force-participation rate remains at a 30-year low and actually ticked down in February (see what Jim Pethokoukis has to say at his AEI blog). But over the past three months we’ve added an average of about 200,000 jobs each month, so there does seem to be a healthy trend — despite shrinking or stagnating government employment.

Liberals have become big fans of the argument that the private sector is, well, doing fine, while shrunken government payrolls that are holding the economy back and worsening the unemployment picture. This is technically true: Government payrolls have shrunk, while private ones have steadily grown.

Most of the shrinkage in the government workforce, it should be noted, has been at the state and local level, where there’s actually been a pretty sharp decline in employment. The federal workforce has in fact been shrinking, not growing as many assume, but it’s done so very slightly.

But what the recent better trend in employment reminds us is that it’s really not very hard for the private sector to pull its own weight employment-wise. Government policy can restrain economic growth in a number of ways — the uncertainty caused by the debt-ceiling fights, for instance, or with fiscal drags such as the fiscal-cliff deal, generally declining defense spending, or the sequester itself — but weak or declining government payrolls have basically nothing to do with our employment picture. Look at the losses in government jobs vs. gains in private-sector jobs:

The public-sector changes are basically non-existent compared to the losses and then the gains in the private sector, only making a blip during the census spike and the following retrenchment.

One obvious rejoinder is that government payroll behavior hasn’t been a sin of commission, since it hasn’t really dragged employment numbers and the federal government hasn’t cut jobs, but a sin of omission: Were government payrolls expanding at their usual healthy clip, as they often have done in recessions, then we’d be looking at a much better employment picture. (Ezra Klein lays out this argument in video form here.) Ergo, we’re told, austerity in Washington and Republicans’ refusal to consider hiring programs has meant that government hasn’t grown like it used to, and the unemployment picture would be better if it had. This is, obviously, technically true: According to Klein’s calculations in August of 2012, had government payrolls grown like they did during President Bush’s recession, we’d be looking at not 600,000 lost government jobs, but 800,000 new ones, giving us an unemployment rate of 7.3 percent. But that’s hardly an inspiring number, and, despite government flintiness, we’re actually nearing that situation now, anyway, six months later.

#more#Second, while I respect the argument for counter-cyclical fiscal stimulus and that can involve government hiring, I don’t think many people believe it’s the role of government to directly replace the jobs lost in a private-sector recession (and short-term hiring isn’t very effective fiscal stimulus or salve for unemployment either, we’ve discovered there’s no longer such thing as a shovel-ready job). Rather, government hires people to provide the services we expect or need — if that does involve creating jobs, that’s okay, but it’s not why we grow or shrink the government. Initially, my instinct was that that was the explanation during Reagan’s and Bush 43’s recessions: Government employment grew for an explicit purpose besides fixing the employment picture. One was ramping up defense spending to end the Cold War, and the other was invading two countries and prosecuting the War on Terror, so they hired lots of new federal workers, ameliorating the employment picture (these are civilian payrolls, but expanding the national-security state involves hiring lots of civilians). But that’s actually not what happened: Federal payrolls stagnated and even shrunk during the 1980s and the 2000s. What actually happened is that, in the 1980s, state and local employment shrunk dramatically (it only stagnated briefly in the 2000s), and then strongly grew in both recoveries — in other words, it’s not the federal government that’s behaving differently, it’s states, cities, and towns.

I think there are a few reasons for this: We’ve just seen a much deeper recession than other modern presidents did, meaning that government revenues have been much more depressed than they were otherwise, which constrains state and local governments’ ability to hire, but in the short term not the federal government’s (the former have balanced budget amendments and face a very different bond market). Further, we had a huge real-estate bust, which seriously hurts local governments and state governments that levy real-estate taxes. And I’d venture that state and local governments are just in worse shape than they were a decade or two ago — state governments have been squeezed by the burden of Medicaid spending, and both state and local governments are seeing exploding pension and retiree-health-care costs (both of these issues affect the federal government to some extent, too, but much less, and again, Washington’s spending isn’t restrained in the same way).

Thus, even if public payrolls really mattered to the employment picture, the sin-of-omission argument thus falls apart, too: In terms of employment, Washington has responded to this recession like it has the past few recessions. It’s not, as our president has repeatedly claimed, congressional Republicans’ newfound extremism or a weak federal response that’s hampering employment growth, inasmuch as government payrolls even matter (and one shouldn’t blame state and local governments for that, either, because they aren’t really capable of restoring spending, as discussed).

Thus, many liberals have suggested, because this recession is different, Washington should be responding to it by supporting state and local government hiring and preventing layoffs. The validity of that proposal is a discussion for another day, but Reihan has had some interesting, disapproving thoughts on it and federalism generally.

Patrick Brennan — Patrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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