Robert Shiller, the Yale University economist best known for his role in creating the Case-Shiller Home Price Indices, had a Labor Day weekend column in The New York Times expressing puzzlement over the drop in state and local government employment. The piece, echoing the themes of President Obama's proposed American Jobs Act, could be a case study in flawed and fallacious Keynesian assumptions.
Shiller begins with a rhetorical question:
"Why have so many teachers, police officers, firefighters and other public workers been laid off since the financial crisis hit -- and why are so few being offered new jobs now?"
The answer, of course, is that state and local tax revenues dried up. What Shiller can't understand is why the public didn't support raising taxes instead.
"Keeping the number of teachers, firefighters, police officers and other public employees in line with the local population seems sensible enough, even if it means higher taxes. Granted, no one likes paying higher taxes. But in this case, the result would be a more livable community and more local jobs."
Shiller believes in a big government multiplier - the notion (far from universally accepted among economists) that a dollar spent on government will yield more than a dollar of growth, sometimes a lot more. As a result, he is also a big fan of government spending as economic stimulus. "If state and local governments had not cut back so much, the broader economy would be stronger today," he writes in his latest Times piece. "That would be true even if they had raised taxes to avoid incurring more debt."
Shiller has made this argument before - here and here. But to support it this time around, he engages in a bit of data mining:
"From July 2008 to July 2012, the number of state and local employees nationwide fell by 715,000, according to the Bureau of Labor Statistics. The reality is actually worse than that figure suggests. The total ended up 1.31 million people below where it would have been had public sector employment simply kept pace with population growth."The situation did not improve as the financial crisis eased and the economy picked up. From March 2009 to March 2012, the nation's total nonfarm employment increased 0.6 percent. State and local government employment, by contrast, fell 2.9 percent."
If you stretch that time frame back a couple of years, however, the statistics tell a somewhat different story. Early in the Great Recession, private and local government continued adding jobs even after the private sector had begun shedding them. Between July 2007 and July 2008, when private firms shed just over a million jobs, the nation's state and local government sector gained 344,000. Over the next 12 months, while private employment plummeted another 5.9 percent, state and local government declined by just 0.7 percent. Fast forward to July of this year: private payrolls had (finally) returned to the 2000 level - but even after the cuts bemoaned by Shiller, state and local governments still employed a million more people than they had a dozen years earlier. Needless to say, multiplier aside, those government employees must be supported mainly by the taxes of private workers.
Trends in government employment have a well-documented tendency to lag those in the private sector--falling later in downturns, and rising later in economic expansions. This tendency was exacerbated by the Obama administration's stimulus package, which temporarily targeted aid to states and local governments for the specific purpose of propping up payrolls they could no longer afford. Not surprisingly, government employment began to fall as soon as the stimulus began to expire in 2010. The stimulus didn't just protect jobs--in the midst of the worst economic downturn since the Great Depression, despite widespread pay freezes and cuts in the private sector, it also financed continuing pay increases for hundreds of thousands of employees shielded by collective bargaining statutes in states like New York.
Shiller says it's a bad thing that government employment has not kept pace with population growth, implying that a direct relationship between the two is not only appropriate but economically necessary. Considering the source, this is a surprisingly simplistic assumption. After all, public schools are by far the biggest government employer -- and the need for school employees is determined by the number of school-age children, not by total population. As it happens, the local government education sector has accounted for fully half the reduction in state and local payrolls cited by Shiller. But relative to pupil enrollment, local school employment remains higher than it was in 2000, the peak of the nation's last sustained economic expansion. (Specifically, as of July 2000, there were 130 local government education employees per 1,000 pupils enrolled in the fall of 2000. As of July 2012, local government education employment came to 132 workers per 1,000 pupils in projected fall enrollment.)
Police departments are another big category of government employment. But here, too, there's a question of productivity that Shiller ignores. For example, New York City's Independent Budget Office has just issued a study suggesting that the city could realize an increase in patrol hours if the average police shift was extended to 10 or 12 hours (with a proportional decrease in police work days per year). To the extent a multiplier actually exists, there's more than one way to capture it.
Shiller seems to think state and local payroll cutbacks have been draconian, or are in danger of becoming so. In fact, measured relative to the economy as a whole, the decrease in state and local government employment has not been exceptional in historical terms. Consider, for example, the state and local government share of all employee compensation, including benefits as well as wages.
From 1971 through 2011 (the latest year for which data are available), the state and local government share of all employee compensation averaged 13.4 percent. Last year, despite state and local job cuts, the state-local share of employee compensation was still above average at 13.9 percent. Indeed, it was the third highest figure on record. State and local compensation would have to drop a lot more to reach the 12.4 percent low of 1981.
Now let's look at state and local government employment as a share of all jobs.
As of July, state and local government accounted for 13.4 percent of all jobs--equal to the average for that month over the past 40 years.
Shiller, like many economists writing about this topic, also implies that state and local governments have slashed their payrolls through mass layoffs. In fact, many if not most government jobs eliminated in the past few years have been simply left vacant after voluntary separations, including early retirements greased by generous incentives. A lot of those former teachers, cops and firefighters have been nowhere near an unemployment line. Instead, they have been collecting generous pension checks, while remaining on their former employers' (taxpayer-subsidized) health insurance plans.
Bolstered by his false assumptions, Shiller describes state and local budget cuts as "quixotic and arbitrary." He chalks it all up to "behavioral economics" -- more specifically, the "the psychological principle of 'framing' -- the notion that when people make decisions without enough deliberation, consultation and information, they are easily influenced by superficial forms and irrelevant details of presentation or wording."
Maybe. Then again, when it comes to state and local budget cuts, maybe the general public actually has a better grasp on the tradeoffs than do ivory tower experts like Shiller -- who seems to be trapped in a "frame" of his own design.