Public employee unions, policy pundits, and -- curiously -- some economists are increasingly complaining about micro-austerity policies. They mean local government job cuts, city by city and county by county, that they point to as a big reason this recovery's job growth has been so anemic.
Two Yale University economists took to the New York Times this month to bemoan "America's Hidden Austerity Program." Maryland Gov. Martin O'Malley said on "Face the Nation" June 10 that public sector job loss "continues to be a drag on the economy." Here we have union groups like Council 5 of the public employees union AFSCME talking about it.
Keeping more people working is clearly good for economic growth, no argument there. But keeping more local government people working and paying for it via increased property taxes, fees and assessments has an economic impact that approximates zero. One offsets the other. That's because local governments are limited in their ability to borrow money and accelerate spending that would not otherwise happen until revenue collection picks up. If city hall ratchets up revenue collections, that money comes right out of consumer spending or even private market hiring.
That makes the whole conversation about local level "stimulus" and "austerity" not exactly grounded in economic reality.
There is no question that the recession that began in December 2007 has been unusual in its deep impact on local government jobs. In Minnesota local government employment peaked at 289,400 jobs in September 2008, some 10 months into the recession. State data out last week showed that total employment for local government had declined by 14,500 jobs, or about 5 percent, to bottom out in April 2012. Proponents of the "stealth austerity" argument say those 14,500 jobs really do move the needle. If those positions were all filled, that would be worth about half a percentage point in the state's rate of unemployment, so instead of 5.6 percent unemployment in Minnesota we would be at 5.1 percent.
Left unsaid is any explanation of how those 14,500 jobs are funded if local government revenue declines. Local units of government cannot run a deficit, not for any length of time anyway, by statute or city charter and also for the simple reason that cities running a deficit someday run out of money. To keep up the funding levels necessary to pay for staff as property values decline and economic activity slows, the city would have to raise taxes and fees.
"Classical theory would suggest ... that you would be taking money from one person and would be giving it to another," said Toby Madden, regional economist for the Federal Reserve Bank of Minneapolis.
Madden said that there are some wrinkles, like if the taxpayer who escaped a tax or fee increase then buried that extra money in a coffee can in the back yard. That's obviously not as productive as payroll dollars for people working and living in the community. And it's one reason all the cash stockpiling by American corporations has come in for some criticism. Apple has a pretty sizable coffee can buried in its back yard.