Shrunken Public Sector Stunts California’s Recovery

Since the onset of the Great Recession five years ago, we have been experiencing the fallout from the bursting of an $8 trillion housing bubble, the collapse of the financial sector, and the loss of 8.7 million jobs in the United States. During the crisis, many economists and policy analysts called for aggressive federal fiscal policy — a massive Keynesian-style stimulus on the scale of a new New Deal. To stop the hemorrhaging of jobs and prevent further economic deterioration, Keynesian macroeconomics posits that the government should offset decreases in private consumption and investment with an increase in public spending.

The $787 billion American Recovery and Reinvestment Act (ARRA), passed in 2009, was not large enough to pull us quickly or entirely from the grips of the worst recession since the Great Depression. Yet it did help. Estimates from a range of sources indicate that absent ARRA, the economy would have had far fewer jobs and weaker growth. The Congressional Budget Office estimated that ARRA created from 500,000 to 2.9 million jobs as of June 2011, while IHS Global and Macroeconomic Advisors estimated between 2.4 and 2.6 million more jobs.

In 2010, political and policy discourse shifted to the deficit and debt. Even President Obama took a hawkish stance in 2010 when he froze the pay of federal workers for two years, a policy move that played into the notion that the deficit was the central economic problem, not lack of aggregate demand due to the recession. As the economy remained weak, many economists advised another round of fiscal stimulus, especially to struggling state governments, but the deficit hawks won the day.

Not only was Keynesianism pushed aside, but also austerity measures were implemented by choice at the federal level, and because of balanced budget requirements, at the state level. As a result, from 2009 through 2011, the stimulus of ARRA and the anti-stimulus of austerity were conflicting policies. In California, it is clear which policy won out.

Since the state budget experienced the largest shortfalls on record, and without the option of deficit spending, the result was significant cuts to much needed programs. With no possibility of passing new legislation to increase state revenues, California enacted program cutbacks to many areas — health care, public safety, education, child care, elder care, and care for the disabled —which resulted in substantial layoffs of the public sector workforce, including significant numbers of teachers.

Enough time has now passed to assess some outcomes of these austerity policies. Indeed, new research has documented the harmful effects that austerity has had on the U.S. economy. An Economic Policy Institute analysis estimated that without state and local austerity in the U.S., there would be 2.3 million more jobs today — with half of them in the private sector.

This article looks at how measures of austerity have affected the economic recovery in California. It is not our intent to debate the merits of the state’s reaction to the recession and the state’s budget decisions, but to document and assess the outcomes of the policies on jobs and economic growth.