How Our Incredible Shrinking Government Raises Unemployment and Hurts the Recovery

With normal post-recession government employment expansion, unemployment might be as low as 6.3 percent.

How is this recovery different from all other recoveries?

After every other recession since the early 1970s, government employment grew. In the four years following the end of the Great Recession, government jobs got the guillotine.

You can see the specialness of our recovery in this compelling graph produced by the Hamilton Project, comparing government employment changes in the four years of recovery after the last six recessions. Since 1970, government employment increased by an average of 1.7 million following a recession. After the Great Recession, government employment has fallen by more than 500,000.

Screen Shot 2013-05-06 at 12.02.02 AM.png

"The policy differences have led to 2.2 million fewer jobs today," Michael Greenstone and Adam Looney write. With 2.2 million more government workers now, assuming the same labor force size, the unemployment rate wouldn't be 7.7 percent. It would be 6.3 percent.

That doesn't mean the "real" unemployment rate is 6.3 percent. It doesn't mean state and local governments should be 2.2 million workers flusher. But it highlights the fact that, in terms of U.S. government responses to recessions, this time is different.

Whatever you think of Rogart, Reinhart, and the art of highlighting Excel boxes, it's intuitive that expansionary public spending (including on people) following a private sector meltdown are useful to help the economy catch up to trend-line growth. But rather than Washington leading the still-weak economy, the cart has led the horse, with the private sector adding roughly 2.2 million jobs over the past year while state, local, and federal governments have shed more than 90,000 jobs.

And that's before the full effects of sequester, which will cut jobs, total spending, and growth from a recovery that needs more jobs, more total spending, and more growth.

The government pull-back is even more striking placed in historical context. The ratio of government jobs to total population has fallen to a 50-year low and will continue to fall throughout the year under current law.

Screen Shot 2013-05-06 at 12.04.42 AM.png

And that's not the only measure of government that is wilting to half-century lows. Consider our non-defense discretionary budget, which is something like our domestic investment budget. NNDS is a catch-all for infrastructure, education, training, disaster relief, environmental protections, international affairs, scientific research, and employee salaries. And under both Obama and Ryan's budgets, it is projected to fall to its lowest share of GDP on record.

Screen Shot 2013-04-16 at 11.34.47 AM.png

So we are slashing public employment's share of the population at the very time that the economy would benefit the most from direct government hiring to counter the effects of long-term unemployment. And we are squeezing the federal investment budget at the very time that we can borrow at shockingly low rates from the rest of the world to buff up our research, infrastructure, and public education.

When liberals become apoplectic over deficit hawks debating Medicare's share of spending in 2023, this is very much what they are yelling about.