Government Has Shrunk More Than the Private Sector in Obama's Term

There is a persistent drumbeat among the right that runaway growth in the size of government at every level is hurting typical businesses. But total U.S. government employment -- including federal, state, and local workers -- has now shrunk by a greater share than the private sector since January 2009, when Obama took office. With unemployment rising for the third consecutive month, private sector growth doesn't appear much healthier for it.


In the graph above produced with St Louis Fed data, I indexed gains and losses using January 2009 as the starting point 100. Government employment is the red line, total nonfarm employment is the green line, and private payroll employment is the blue line. The red (government) has just crossed below the green and blue.

The private sector employs a larger share of the economy than government, by about a five to one margin. But the decline within government has offset gains in private industries in the past few months. This decline has come mostly from state and local governments. Since August 2009, the economy shed 124,300 local education jobs alone.


One of the most important, and most misunderstood, aspects of the Recovery Act (aka the stimulus) was that more than a third of the money went directly to states to help them pay their bills and keep their employees. Today, the stimulus spigot is dry. But if the first few months of 2011 have taught us anything it is that: (1) if the stimulus didn't work out, the opposite is working even worse, and (2) job growth coming out of a recession is heavily reliant on factors exogenous to private consumption -- meaning government support or overseas demand. The fastest growing states, sectors, and industries in the last few years are mostly in commodities, finance, or near government-supported areas like defense and health care.

Republicans pushing for a budget deal with more than 80% spending cuts are operating under the presumption that government is bad for economic growth. In the long run, they have a better case. Heavy government involvement in certain industries can dampen productivity growth, which can lead to waste, needlessly high costs, and mismanagement of resources. But in the aftermath of a recession, the evidence is piling up that the economy isn't ready to shed the crutches of government support.