This piece from The Washington Independent offers a clear explanation of the impact that state budget shortfalls are having not only on state-level taxes, but on the national employment picture.
States and towns, because they have to balance their budgets, have been forced into counterproductive binds, where they are left with the choice of raising taxes or firing workers.
Politics being what it is, layoffs tend to win — the consequences be damned. That’s what we are facing here in New Jersey with a budget gutting governor intent on pushing through an ill-conceived and foolish spending cap that might help keep taxes down but will result in problems for both the state and local governments down the road — and for the economy at large — problems not likely to crop up until Chris Christie has left the building.
Teachers already have been laid off, angering parents, and we can bet on cuts in police and fire and other areas.
Christie, of course, is just cleaning up after too many politicians from both parties partied hard and left the state in a shambles. The budget he signed the other day is pretty painful, though it also is filled with one-shot budget savings and gimmicks (we cannot keep avoiding making payments into the pension system) and it is brutally ideological.
He is just doing something that Jon Corzine lacked the will to do as governor and that Barack Obama has failed to do as president — use the state budget crisis to impose his ideological vision.
But that is a tangent. New Jersey is dysfunctional in many ways — too many towns and school districts, too much overlap, too much reliance on tradition and a legacy of inertia in Trenton — but it is not alone on the Island of Misfit Toys. New York, Nevada, California — the list of states that have failed in their fiduciary duties to taxpayers is long and bipartisan. Decisions made at the state level have generally been shortsighted, and the bill has come due.
That said, we have to acknowledge another player in this game: the Bush administration. The increase in aid to states and local governments during the Bush yearswas a little smaller than during the eight years of the Clinton administration, but it represented a much smaller percentage increase and a shrinking percentage of all state revenues. That only compounded the other revenue problems states have been facing.
As Ethan Pollack of the Economic Policy Institute points out in an issue brief, public sector job losses create private sector job losses:
So far local governments have laid off 3,338 public servants for each billion dollars they faced in deficits. Assuming the ratio remains constant, this suggests that local public employment will fall by 155,750 jobs between now and June 2011 and by 66,750 jobs between July 2011 and June 2012. This adds up to an impending 222,500 drop in local public employment between now and June 2012—in other words, over half of the local job losses have yet to hit the economy.
This back-of-the-envelope estimate may understate the total expected job impact: local governments tend to cut the low-hanging fruit first rather than immediately resorting to the politically unpopular and difficult option of publicsector layoffs. This suggests that the ratio of layoffs-to-deficits may increase in the future. For example, a recent report from the American Association of School Administrators estimates that through June 2011 around 275,000 education jobs (75% of which are funded by local governments) will be lost (Ellerson 2010).
This massive job loss will harm far more than the public servants who face unemployment. For one, our communities will be deprived of the vital services they deliver. Schools would see larger class sizes, our homes would be less protected from fire, and our streets would become less safe. This is already happening across the board—according to a survey from the National League of Cities, 71% of cities have instituted hiring freezes and layoffs (McFarland 2010).
These layoffs also ripple through the entire economy. Each 100 public-sector layoffs also leads to 30 private-sector layoffs, mainly due to a loss of incomes and consumer spending that reduces demand for goods and services across the economy. The total employment impact of these public-sector layoffs—including private job losses—would actually be just under 300,000 jobs lost.
While slashing public payroll to get state budgets under control would seem logical, it actually is counterproductive and will lead to greater deficits down the road. The fact remains, we cannot get control of deficits unless we get people back to work (the numbers of longterm unemployed and underemployed are at record levels), which will lead to an increase in tax revenue for all levels of government. And we cannot move our economy into the 21st century without investing in things like education and modern infrastructure.
A massive increase in federal aid to states is an absolute necessity — along with federal transportation and education aid. Without it, our economy is just going to accelerate downward into a Japanese-style stagnation that Paul Krugman has repeatedly warned us about.
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