Schafer: The myth of local government austerity

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: June 20, 2012 - 9:16 PM

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.

But for a budgetary policy to be stimulative, you have to borrow the capital and then cut taxes or just spend it. That is the simplest way to characterize what Congress did with the $787 billion federal stimulus program in 2009. The Treasury Department issued debt at near zero real interest rates and then the administration scattered the proceeds all around the country. Political candidates may be arguing about the effectiveness of this, but economists broadly agree that the federal stimulus program was genuinely stimulative.

To save jobs with a similar plan on a local level, a city would have to issue bonds to investors and use the proceeds to fully fund police, public works and other staff-heavy services. One example of why this doesn't happen is the city of Bloomington. It is one of a relative handful of municipalities in the nation whose debt is rated AAA by the big three credit rating agencies. So its debt costs would be cheap -- but only until Moody's or Fitch caught wind of any proposed Bloomington economic stimulus plan.

Mark Bernhardson, the Bloomington city manager, said simply that "you've got to pass a balanced budget."

No one is arguing that job cuts aren't painful, or that local government officials have not faced difficult choices. The current economy doesn't offer abundant good job prospects for employees trained in policing or social service administration. But more realistic responses than looking for stimulus programs are to wait for local government revenue growth to bring the jobs back or to retrain workers for private sector opportunities.

The experience of a bedrock city like Bloomington shows how deep the downturn was in local government. Bloomington at the end of 2010 and 2011 was down about 50 positions from its full complement of 569 full-time staff, achieved by leaving jobs open unless they were absolutey critical.

"One of our strategies for a long time was to carry only the total number of employees that would be [funded] in a normal downturn," Bernhardson said. "And this wasn't a normal downturn."

The League of Minnesota Cities reported that 26 percent of Minnesota cities reported reduced staff in 2009, 25 percent did in 2010, and 20 percent did in 2011. League policy analyst Lena Gould said that in addition to leaving jobs open, cities have been cutting employees. She has recorded 89 examples of municipal layoffs in the state in the recent past, and she added that she has certainly missed many more that did not come to the League's attention.

None of this has escaped the attention of public employee unions in their advocacy among public officials. In a brief conversation with Jennifer Munt, public affairs director of the AFSCME Council 5, she talked about the impact of public sector job loss on Main Street businesses. She explained that the 43,000 employees in AFSCME Council 5 have an average cash compensation of about $38,000 per year.

"People at that level of income, they spend every cent they earn," she said. "Tax refunds for millionaires do not help grow the economy."

Neither will misguided attempts at local stimulus.

lee.schafer@startribune.com • 612-673-4302

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