Paying the Price for Austerity

The blame for the slow economy falls on policymakers' obsession with deficit reduction.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

May was almost surely the 39th straight month of private sector job creation (we'll know for sure Friday when the Labor Department releases its jobs report). By many measures, however, the job market remains in a funk. Much of the blame falls on policymakers' obsession with deficit reduction over job creation.

As the chart below shows, through April the private sector had created jobs for 38 straight months. While private employers added 6.8 million jobs to their payrolls, state and local government employment fell by 626,000 jobs. Average monthly job growth of 162,000 (private and government combined) was well short of the 200,000 to 300,000 or more per month that would mark a robust jobs recovery.

[See a collection of political cartoons on the economy.]

As a result, total nonfarm employment has not yet returned to its level of five and a half years ago, at the December 2007 start of the recession (see next chart). Moreover, we need substantial job growth beyond just returning to where we were to accommodate subsequent population growth, lure people back to the labor force to actively seek work, and restore full employment.

[Read the U.S. News Debate: Should Congress Extend Federal Unemployment Benefits?]

The human cost of inadequate job growth has been substantial. About 12 million people are officially unemployed, meaning they recently looked for a job but didn't find one. Another couple of million wanted a job, were available for work and had looked sometime in the past year, but not recently enough to be counted as officially unemployed. Yet another eight million wanted a full-time job but could only find part-time work. All told, that's about 22 million people unemployed or underemployed.

Almost two out of every five jobless workers has been looking for work for at least six months. Such long-term unemployment during and after the Great Recession is beyond anything we've seen before in data that go back to World War II. Long-term unemployment is particularly problematic because it can have lasting effects on the health and well-being of those workers and their families, their future job prospects and even the economy's longer-term growth prospects.

In 2009, President Obama and Congress enacted the Recovery Act – a significant anti-recession package of tax cuts and spending measures. The Congressional Budget Office estimates that, as a result, real (inflation-adjusted) gross domestic product and employment were noticeably higher than they otherwise would have been (and other non-partisan analysts have reached similar conclusions). The sharp decline in monthly job losses in 2009 shown in the above chart, for example, coincided with Recovery Act implementation.

[See a collection of political cartoons on Congress.]

Unfortunately, policymakers shifted federal budget policy prematurely to deficit reduction in 2010, and it has remained locked in that mode ever since. As a recent analysis by the San Francisco Federal Reserve Bank concludes:

Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries.

That's bad news for unemployed workers, especially the long-term unemployed.

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