Matt Yglesias has written a very useful post on the nature of the jobs recovery we’ve seen so far. I’m going to parse his post and add some thoughts of my own:
In a normal year, government employment goes up. After all, the population is growing so providing the same quantity of public services requires more personnel.
Importantly, I don’t think it’s obvious that we’d need to increase public sector personnel to deliver the same quantity of public services. We deploy productivity-enhancing innovations in many service industries, and it seems fairly clear that there is room for improvement in the organizational structure of many public bureaucracies. Much depends on the nature of demographic change and the openness of the relevant bureaucracies to productivity-enhancing innovation.
For example, if the number of children with limited English-language proficiency is increasing, it is possible that we’ll need a somewhat different mix of educational professionals than we’d need in a counterfactual world. Similarly, the changing balance of children under 5 and adults over the age of 65 implies a difference mix of skills in the public sector. Eldercare is fairly labor-intensive, and the aging of the population could strengthen Matt’s point. It is also possible, however, that we could deploy far fewer teachers if, for example, we did a better job of sorting student populations, so that we limited the amount of disruption in the modal classroom.
And if the education and health sectors were open to more business-model innovation, it is possible that certain services that are now “high-touch” could become “low-touch” over time. But this requires an openness to trial-and-error processes that tends to be lacking in the public sector, for a whole host of reasons that include, but are not limited to, resistance from organized labor.
The premise that a growing population requires a growing number of public sector workers is important to what follows in the post.
At the same time, the workforce is growing so it’s possible for the economy to support a larger quantity of public sector workers. And you would assume that during a period of allegedly explosive growth in the size and scope of government, that public sector employment would increase by an unusually large amount. Instead, it fell.
It’s important to ask about the composition of the growing workforce and the compensation structure of the public sector workforce. If a expanding public sector employment is a really big component of the growing workforce, there is a fiscal sustainability question that arises. This is something that we saw during the 2000s, as Michael Mandel observed in BusinessWeek in 2009:
Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.
But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support. I’ve been talking about the HealthEdGov sector. …
Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.
I think it’s safe to say that this is not the kind of recovery conservatives want, or at least not the kind of recovery this conservative wants: one in which much of the “private sector job growth” derives from heavily-subsidized parastatal sectors. My rough impression is that there was a productivity boom at the high end of the labor market, as described in Wired for Innovation, and this swelled tax revenues at the state and local level. And so tax revenues translated into a large number of public sector and quasi-public jobs. Many if not most of these jobs were at above-market levels of compensation, particularly when we factor in the true value of deferred compensation.
Again, doesn’t sound super-sustainable to me. At least some conservatives, and I count myself among them, suspect that we might have seen a broader-based private sector jobs revival had the spending burden at the state and local level been more restrained during this period. We could be wrong! But that’s a widely-shared gut instinct.
Which is to say that conservatives have been getting the kind of economic recovery they say they want. The private sector is growing and the public sector is shrinking.
To which I ask: which part of the private sector and which part of the public sector? I actually do think that the parastatal sectors that flourished during the 2000s aren’t the only job-gainers this time around, which does strike me as a salutary development.
I say: the net impact of this has been terrible. They say: what? I don’t know. Generally they deny that it’s even happening. But is the conservative line that had we laid off more government workers the private sector would have both picked up all that slack and also created even more extra jobs on top of that?
This all goes back to the question of sustainability. Rejecting the premise that the growth in the public sector workforce was a perfectly natural and necessary response to population growth, many conservatives believe that the balance between the private and public sector has to be righted. This might not be the ideal moment for correcting that balance, as Matt goes on to suggest, but this is a moment when advocates of public sector reform have leverage thanks to the strong fiscal constraint of collapsing tax revenues. I want to underscore that this is not the best imaginable approach — but the best imaginable approach is, I’ll argue, politically implausible.
My view is that that’s backwards. The best time to seek to streamline the public sector is when the private economy is humming along.
This strikes me as totally backwards. Think about this: if you’re a for-profit firm that is flush with cash, do you lay off large numbers of workers? Of course not. You might even be more forgiving of incompetent workers, and you’ll certainly be more forgiving of below-average workers. This was one of the drivers of the private equity boom: firms that are flush with cash tend to be profligate in how they deploy resources. The same appears to be true of many — not all — public sector bureaucracies. The defense sector comes to mind, as does education. There is no impetus to make productivity-enhancements and to impose tough organizational discipline in this environment.
When the economy is growing strongly, if you lay off a janitor at the DMV he can get a job as a janitor at the new office building across the street. When the economy is growing, if the state lays off an accountant then the manufacturing firm across town might hire a new accountant.
This would be terrific. But again, a government that is flush with tax revenues isn’t going to lay off workers for laughs, or even for efficiency. The political cost is too high. Can you imagine a governor scrambling to secure reelection declaring that even though tax receipts are skyrocketing, he intends to lay off 20 percent of her state’s public sector workforce?
But when the economy is weak, you lay off the janitor and it takes him 12 months to find a new job. During that time, all the stores he used to shop at have lost a customer. And all those lost customers are a drag on the entire value chain of manufacturing, shipping, and retailing of goods. That, in turn, makes it harder for laid off workers to find new jobs further delaying the pace of transition.
I want to emphasize that Matt is right: this is really, really unfortunate. But layoffs won’t happen when times are flush. If they won’t happen when tax receipts collapse either, the public sector workforce will grow unabated.
To me, that’s what’s happening here. But what do conservatives think? They don’t even seem able to acknowledge that government is shrinking.
I obviously can’t speak for all conservatives, but what I think is that some political realism is required. To the extent fiscal stimulus is required, I think it should be big and crude, e.g., payroll tax holidays, etc. Josh Barro of the Manhattan Institute says that panicked cutting at the state and local levels tends to be very counterproductive, and I think that’s right. Creating a system in which states can take “advances” against future transfers might impose the right kind of discipline. But I’m certainly not going to pretend that this is an easy problem to solve.