State and local governments still desperately need federal fiscal aid to prevent harmful austerity measures

by nyljaouadi1
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In March and April of this year, the economy lost an unprecedented 22.1 million jobs. From May to August, 10.6 million of these jobs returned. But nobody should take excess comfort in the fast pace of job growth in those months. It was widely expected that the first half of jobs lost due to the COVID-19-driven shutdowns were going to be relatively easy to get back. But even with the jobs gained since April, the economy remains 11.5 million jobs below its pre-pandemic level in February, and the low-hanging fruit have been largely plucked. One of the key factors that will radically slow the pace of job growth in coming months is the looming state and local fiscal crisis. Using data from the recovery from the Great Recession, we simply show how state and local austerity and job loss can be a lagging indicator, putting severe downward pressure on growth even years after the official recession ends. We find:

  • From the beginning of the Great Recession in January 2008 to the trough of state and local government employment, 566,000 state and local government jobs were lost.
  • The state and local employment trough occurred in July 2013, more than five-and-a-half years after the official start of the Great Recession.
  • During the official recession from January 2008 to June 2009, state and local governments actually added 142,000 jobs.
  • In the first year of recovery (from June 2009 to June 2010), the state and local sector lost 215,000 jobs. The 73,000 jobs lots between December 2007 and June 2010 constituted just 0.3% of state and local employment. Even a year after the recession officially ended, cuts in the state and local sector were greatly softened by the substantial federal fiscal aid included in the American Relief and Recovery Act (ARRA).
  • In the second year of recovery (from June 2010 to June 2011), the state and local sector lost 368,000 jobs. Job losses continued through July 2013, with another 250,000 jobs lost.
  • State and local governments have already lost jobs during this contraction and are recovering slower than the private sector. Without federal aid now, more jobs—in both the public and private sectors—will be lost down the line.

These data are presented below in Figure A. Figure B presents job-losses for state and local and private sector jobs, both indexed to their December 2007 business cycle peak. The upshot of this analysis for today’s policymakers is clear: the severe blow to state and local budgets caused by the coronavirus shock is going to drag on growth for years to come absent bold action from federal policymakers. In the case of the Great Recession, the combined effect of job cuts and cuts to other state and local spending delayed a full recovery to pre-Great Recession unemployment rates by more than four years. The lessons could not be clearer: without substantial federal aid to state and local governments, and soon, our near-term economic future will be substantially worse.

State and local government job losses will play out for a long time without substantial federal aid: Change in state and local government employment over the course of the Great Recession and recovery, thousands

State and local job change, thousands
Recession (Jan 2008 – June 2009) 142
First year of recovery (6/09 – 6/10) -215
Second year of recovery (6/10 – 6/11) -243
Third year of recovery (6/11-6/12) -198
June 2012 to July 2013 trough -52
ChartData Download data

The data below can be saved or copied directly into Excel.