States Fail to Save Jobs

A Long Island newspaper reports that the New York is cutting 3,722 workers from the state payroll in order to reduce its budget shortfall. These job cuts are in spite of federal stimulus funds that were intended, in part, to prevent job loss among states’ employees.

A Wall Street Journal article reminds us that this winter the administration asserted that the stimulus package would create or save 3.5 million jobs. While the situation in one state certainly does not prove that the stimulus has been ineffective, it does bring to light the difficulty of measuring whether jobs have been “created or saved.”

The enormous spread between the states and the White House reflects how difficult it is to measure job creation and attribute it to a specific cause. The result, a hodge-podge of numbers, could accelerate criticism that the stimulus isn’t doing enough to reduce unemployment.

Empirical economic claims can sound convincing in politicians’ speeches, but current federal spending provides an opportunity to evaluate the accuracy of such a statement as the stimulus policy unfolds. Obviously the unemployment situation has worsened since the stimulus package passed. But in spite of the rising ranks of the unemployed, can we say that the bill has saved or will save 3.5 million jobs? The answer is: we don’t know. Policy makers can generally make such bold assertions about the economy because there is simply no way to test their claims.

While we cannot calculate the specific effects of the stimulus, the current recession has led to the unveiling of many unsustainable government spending habits. In addition to New York state workers losing their jobs, painful spending cuts are on the table in California, Arizona, New Jersey, and Nevada. We cannot know conclusively the impact of the stimulus on state budgets, but we can observe a pattern of state spending that tends to grow until rising deficits force legislators to make difficult decisions.

Government spending cannot support long run economic growth because it relies upon the prosperity of the tax base, a base that is eroded by continually rising tax rates as companies leave for places with lower taxes and entrepreneurship declines. If states chose to provide a reliable level of public services irrespective of the business cycle, they would be able to maintain this level, facing relatively minor challenges as state revenue fluctuates with the business cycle.

In an effort to achieve steady and reliable state budgeting processes, policy makers in Maine and Washington are considering limits to their own spending. While the transition to fiscal prudence will be difficult if these states decide to undertake it, a consistent institutional environment is necessary to achieve low unemployment rates and economic growth in the long run.