Two Sides of an Ugly Coin: Dwindling Government Aid and Employment

Public sector jobs and aid are declining, which is trouble for the fragile economy

Business pages nationwide are still reeling from last week's dismal employment numbers. As the third month of lower-than-expected growth settles in, and as the future of the nation's own financial health gets contentiously figured out in Washington, it's becoming clear that the effect of the 2009 stimulus bill is all but over. Two stories last night reported on two different ways in which fading government spending hampers a return to shrinking unemployment and increased consumer spending. At The New York Times, Motoko Rich reported that "close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics," but that input is about to dwindle as state and federal benefits run out by the end of this year. At The Atlantic, Derek Thompson used data from the St. Louis Fed to make graphs that show a sharp decline in government jobs (federal, state, and local). Together, the two reports show the government is reducing spending, and as it does, economic indicators lag.

"Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on a recovery that is still quite fragile," Rich wrote. "Throughout the recession and its aftermath, government benefits have helped keep money in people’s wallets and, in turn, circulating among businesses. Total government payments rose to $2.3 trillion in 2010, from $1.7 trillion in 2007, an increase of about 35 percent." But Thompson pointed out that more than a third of the Recovery Act spending went "directly to states to help them pay their bills and keep their employees." Now that that's drying up, government employment has fallen off, as Thompson's graph illustrates.

And for those receiving government aid, a similarly sharp reduction is on the horizon. Rich extrapolates on what jobless numbers mean for those currently living on unemployment insurance.

In Arizona, where there are 10 job seekers for every opening, 45,000 people could lose benefits by the end of the year, according to estimates from the state Department of Economic Security. Yet employers in the state have added just 4,000 jobs over the last 12 months.

Some other states will also feel a disproportionate loss of income unless hiring revives. In Florida, where nearly 476,000 people are collecting unemployment benefits, employers have added only 11,200 jobs in the last year. In Michigan, employers have added about 40,000 jobs since May 2010, but about 267,000 people are claiming jobless benefits.

Both of these trends mean people looking for work are going to turn more and more to the private sector. But as Rich points out, repeated extensions of unemployment benefits have had a "chilling effect" on hiring, as companies spend more and more to underwrite those jobless benefits. Perhaps the silver lining to a reduction in those receiving jobless benefits will be an increase in hiring (though that will take some time to come about). But if the lack of income and subsequent lack of spending sends the economy further into a tailspin, there will likely be more signing up for that government assistance as they get laid off. Both Rich and Thompson make roughly the same depressing point: All that government stimulus spending didn't work very well, but not shelling out the cash would be so much worse.