Economic Policy Still Failing U.S. Workers

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Since the Great Recession was formally declared over in June 2009, the economy has experienced only two quarters of above-trend growth in real GDP – growing at an annual rate of 5.0 percent in the fourth quarter of 2009 and 3.7 percent in the first quarter of 2010. For the rest of 2010, real GDP growth was disappointing – a point driven home in the recent downward revision of fourth quarter GDP growth from 3.2 to 2.8 percent. Employment -- which in February 2011 was still below its December 2007 level by nearly than 7.5 million jobs -- will add just 2 million jobs this year at this rate of growth. That’s a scant 1 million more jobs than are needed to keep up with the growth of the working age population, and will reduce unemployment by just half a percent over 2011.

The economic problem is clearly one of slack demand. The pain experienced by workers as a result of the slow growth in real GDP is palpable. Yet, there is no leadership in Washington and no grassroots political pressure to renew, let alone expand, government stimulus measures. Quite the contrary: Fiscal policy in 2011 and 2012 looks set to embrace spending cuts that will reduce the rate of real GDP growth below CBO’s forecasts of 3.1 percent in 2011 and 2.8 percent in 2012 – rates of growth already too low to make much of a dent in the unemployment rate. Unemployment in the CBO projections is expected to end 2011 above 9 percent and 2012 above 8.

The deal struck by the President and Congress at the end of 2010 – to extend tax breaks, including for the wealthiest Americans, and extend unemployment insurance benefits for the long-term unemployed – was intended to offset the effects of the winding down of the 2009 fiscal stimulus measures. Spending cuts at the state and local levels are already undermining the effect of the tax deal on growth and job creation. The further spending cuts demanded by Republicans in Congress and the attacks by Governors on state and municipal workers are unconscionable. Goldman Sachs economist, Alec Phillips, estimates that the spending cuts in the bill passed by the House will result in a drag on GDP growth of 1.5 to 2 percentage points in the second and third quarters of this year compared with current law. The House has not yet considered the FY 2012 budget, so Phillips doesn’t examine 2012 effects. That would reduce real GDP growth to about half the 3.1 percent growth rate projected by CBO. Moody’s Mark Zandi estimates that the spending cuts proposed by House Republicans would reduce GDP growth in 2011 and 2012, and would mean 400,000 fewer jobs created this year and 700,000 fewer by the end of 2012.

Where the negotiations between the House and Senate on the FY 2011 and FY2012 spending bills will end up is anybody’s guess. Both Zandi and Phillips are confident that a deal will be struck to spare the economy the full effects of the Republican proposals. Zandi believes that lawmakers are likely to split the difference between the administration and House Republican proposals. In Phillips' view, the likely outcome is a deal to reduce discretionary spending by $25 billion below the CBO base line this year and $50 billion next. This seems optimistic in view of the intransigence of newly elected House Republicans.

Even these more “modest spending cuts,” as Phillips describes them, would shave 1 percentage point off of growth in the middle of this year. He expects the rate of real GDP growth to recover by the end of 2011, but that projection was made in the absence of consideration of Republican spending cut proposals for 2012. Both analysts view this emphasis on immediate cuts in spending as less than ideal as economic policy, but both believe, as Zandi put it, that “the economy will be able to manage through it.”

While the economy – whatever that abstraction means – may ‘manage’ through it, the same cannot be said for the almost 14 million Americans who are unemployed, a figure that rises to 25 million when we add in the underemployed and those who want a job but have given up looking for work. For them, more than three years after the start of the recession, the pain continues unabated. Anemic job growth in the 20 months since the recovery began has deepened their plight. The economy shed more than 8.7 million payroll jobs between the onset of the recession in December 2007 and February 2010 when the slide in jobs finally ended. In the year from February 2010 to February 2011, the economy added less than 1.3 million payroll jobs.

Phillips also looks at the macroeconomic effects of cutbacks at the state and local levels, and concludes that they are minor – likely to shave just half a percent of the rate of real GDP growth in 2011. But macroeconomic effects encompass employment as well as output. Here the picture is far darker. Moreover, the effects of these cuts fall dispropotionately on women.

The two bright spots in the employment picture -- sectors where job growth held up through the recession -- are education/health services and government. As overall employment fell from December 2007 to February 2010, education and health services added 844,000 jobs. And as overall employment recovered, this sector added another 425,000 jobs – about a third of all jobs added in the last 12 months.  Men, who made up 23 percent of employment in this sector in December 2007, accounted for 25 percent of the jobs added during the period when the labor market was contracting and 36 percent of jobs added since February 2010. Job growth in this sector, which has provided an essential support to the labor market, is threatened by proposed cuts in Pell grants to students for tuition assistance and by state cut backs in Medicaid spending.

Employment in the government sector also held up during the recession. The gender composition is more mixed in this sector, with women holding 57 percent of jobs and men 43 percent. Government employment expanded from the beginning of the recession through the second quarter of 2010, adding 607,000 jobs over that period, with men accounting for just over half the increase. In the third quarter of 2010, the beginning of the new FY2011 budget year in most states, government employment dropped sharply as budget cuts took hold. Nearly half a million government jobs (449,000) were lost in that quarter alone, with women absorbing 60 percent of the job losses. In total, more than three-quarters of a million government jobs (745,000) were eliminated between May 2010 and February 2011. Job loss in this sector slowed in the fourth quarter of 2010, with women accounting for nearly all of the jobs lost in that quarter. public sector job losses for the first two months of this year have been shared proportionately by men and women.

In contrast to earlier post-War recessions, the federal government continues to deny states additional resources to see them through a period of continued weak tax receipts. As a result, budget battles are heating up in states governed by Democrats as well as Republicans. Governors who slash jobs and vital services – including K-12 education, health care for children, and supportive services for the elderly and disabled – are being hailed as heroes. We can expect sharp job losses again in this sector in the third quarter of this year as FY2012 budgets go into effect in the states.

These developments do not bode well for the labor market and workers’ job prospects. Cut backs in government employment and slower growth in education and health services places greater responsibility for job growth on private sector employers. They performed weakly last year, and are expected to do only marginally better this year. Job growth for women in the private sector outside of education and health services has lagged behind even the slow recovery experienced by men. More than a quarter of all payroll jobs lost between December 2007 and February 2010 were lost in manufacturing – 30 percent of these by women. In the recovery since then, only 8 percent of manufacturing jobs have been regained. All of the job gains, however, have gone to men while women in this sector continue to lose jobs.

The economy, as Zandi and Phillips contend, is likely to continue to grow albeit slowly, but the outlook for workers remains grim. In the absence of a further federal stimulus and a new round of revenue sharing with the states, the pain for workers will continue with much of it falling on women.