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Conservative Budget Cuts Bad for State Economies
The Greater the Spending Cuts, the Worse Off Our Middle Class Is
There is no question that our nation is still suffering a raging hangover from the Bush-era bubble economy that left much of the middle class behind. What our economy needs are jobs, economic growth, and more jobs. Yet Republican politicians from Speaker of the House John Boehner (R-OH) to Governors John Kasich (R-OH), Scott Walker (R-WI), and Chris Christie (R-NJ) think the miracle cure for our economic woes are steep and immediate public spending cuts.
This is no miracle cure. It is a prescription for more economic misery.
The analysis presented here shows that steep spending cuts are hampering economic recovery in some states while other states that resisted cuts or increased spending are now seeing lower unemployment rates, faster private-sector job creation, and stronger economic growth. The bottom line: States that swallowed the bitter pill of steep cuts are the worse off.
Given the negative association of state spending cuts with labor market and broader economic outcomes, we should all be grateful that the 2009 American Recovery and Reinvestment Act dedicated $142 billion, or 18 percent of its resources, to keep states from digging themselves deeper into the jobs and growth hole. Certainly policymakers should seize every opportunity to eliminate waste and improve the efficiency of delivering government functions. But the reality is that government spending is already quite lean and mean. Spending cuts achieved or championed by conservatives are aiming much deeper at public services and public investments that support a tremendous amount of activity in our economy:
- Providing critical work in education and public safety
- Delivering social services and Medicaid to those hit worst by recent economic hardships
- Creating a foundation of infrastructure investment and services needed to support flourishing private businesses.
So let’s run the numbers. From the start of the Great Recession in December 2007 through the end of 2010, 24 states have cut government spending by an average of 7.5 percent after adjusting for inflation. Another 25 states have expanded government outlays by an average of 11 percent. (The analysis excludes Alabama due to data problems reported by the National Association of State Budget Offices). And the differences in these states’ economic performance could not be more self-evident. Relative to national economic trends, states that increased spending enjoyed on average:
- 0.2 percentage point decrease in the unemployment rate
- 1.4 percent increase in private employment
- 0.5 percent real economic growth since the start of the recession.
In contrast, states that cut spending saw on average:
- 1 percentage point increase in the unemployment rate
- 2.1 percent loss of private employment
- 2.9 percent real economic contraction relative to the national economic trend.
The three figures presented in the accompanying charts demonstrate that steep state government spending cuts have gone hand-in-hand with rising unemployment, falling private-sector payroll employment, and lower real growth in states' gross domestic product, or GDP—the sum of all goods and services produced by labor and equipment in each state, minus imports. The analysis, however, does not tell us whether the spending cuts caused the negative economic outcomes. But in all three cases, steep spending cuts are statistically associated with markedly worse economic performance.
Bigger state spending cuts, higher unemployment rates
Change in unemployment rate compared to national average, December 2007 to the end of 2010
States that cut government spending significantly increased unemployment rates since the start of the Great Recession. The red diagonal line in this chart—based on measurements of each state's economic indicators—shows the average relationship between cuts to public spending since the start of the Great Recession and changes in the unemployment rate relative to the national trend. The upward sloping line indicates that steeper spending cuts are associated with larger increases in state unemployment rates, whereas spending increases are associated with falling unemployment rates. Every 10 percent cut in state spending is associated with a 0.4 percentage point increase in the state unemployment rate.
Bigger state spending cuts, more private employment losses
Percentage change in private employment compared to the national average, December 2007 to the end of 2010.
This chart repeats the analysis in Figure 1, but substitutes changes in total private-sector employment since the start of the Great Recession for changes in the unemployment rate. The downward sloping red line shows states that cut spending are seeing significantly more job losses in the private sector than states maintaining or increasing spending levels. This spending is not just about jobs for public service workers, but also has far reaching ramifications for private businesses and their workers, too. State economies lost 1.6 percent of their private-sector jobs for every 10 percent cut in state spending.
Bigger state spending cuts, weaker economies
Percentage change in real state GDP growth compared to the national average, December 2007 to the end of 2010
This chart examines the relationship between spending cuts and state GDP growth. The chart shows that steep spending cuts are taking a toll on the overall economy as well. The downward sloping red line shows states that cut spending experienced slower economic growth or steeper economic contractions since the start of the Great Recession, adjusting for inflation. For each 10 percent cut in spending, states experienced 1.6 percent contraction in real state GDP.
Technical note on our analysis
State spending data are adjusted for inflation using the GDP price index. National changes have been removed from data on state unemployment rates, private payroll employment, and inflation-adjusted GDP growth to more clearly identify state-level economic performance. The analysis in the three charts weights each state's data by population size to give a better reflection of a national average effect of cutting state government spending on economic performance. Weighting the analysis as such does not materially change the significance or size of the effect of cutting state spending.
State spending cuts: National Association of State Budget Offices, “State Expenditures Survey”; various years. Includes all expenditures less federal transfers. Adjusted for inflation using U.S. Bureau of Economic Analysis, GDP price deflator, National Income and Product Accounts Table 1.1.4.
Unemployment rates: U.S. Bureau of Labor Statistics, “Current Population Survey.”
Private employment: U.S. Bureau of Labor Statistics, “Current Establishment Survey.”
Gross domestic product: U.S. Bureau of Economic Analysis, “National Income and Product Accounts Table 1.1.6."
Adam Hersh is an Economist at the Center for American Progress.