Saturday, September 07, 2013

If Grandma had wheels we could end this recession!

People, I just can't take it anymore. I can't stick my fingers in my ears and cover my eyes and avoid dealing with the "lack of government jobs is holding back the recovery" BS any longer. The one that pushed me over the edge was from the usually excellent Neil Irwin at Wonkblog (hat tip to Mark Thoma):

 One of the reasons for quiet optimism about the economy over the last few months has been the possibility that state and local governments have finished their long retrenchment and that government hiring might soon contribute to job creation. 

 Never mind. 

 From July 2008 to January 2013, the sector shed more than 737,000 jobs. Had the jobs merely been maintained, the unemployment rate would be as much has half a percentage point lower. Indeed, the state and local pullback is one significant reason that this recovery has been weaker than those in the past.

 Gentle readers, I humbly submit to you the case that in all likelihood, it's the weak recovery that has caused the state and local pullback, not the other way around!

We have had a much worse recession than previous ones, along with a crash of housing prices. State and local governments are fully funded by tax revenues, and at the local level, property tax revenues are a big factor.

So it's entirely likely that the size and nature of this "great recession" has caused state and local government employment to be very weak compared to previous recoveries.

Irwin (and countless others) are making the same mistake as taking Rogoff-Reinhart's numbers and claiming high debt slows growth, when there is a clear case for the opposite view, that slow growth creates high debt.

Exercises like, "if this sector had done this, then the economy would have done that" are just meaningless. They are the equivalent of "if grandma had wheels she'd be a bicycle", but with fancy charts.

Causality is not inherently ideological, though appeals to causal problems often seem to be.


Patrick R. Sullivan said...

And along come Nickel and Tudyka to smash the ball back into the Keynesians court;

'The cumulative response of private investment turns increasingly negative as government indebtedness increases. In particular, the cumulative effect on private investment turns negative for the first time at debt ratios of approximately 57%.'

Guess what they find at 90%.

Another old friend appears;

'In sum, our findings lead us to conclude that the contradictory findings of previous studies may be the result of estimation within a static debt regime when indeed the debt regime is dynamic.'

JorgXMcKie said...

I'm not an economist, I'm just a guy who teaches public budgeting. I've got a lot of former students out there working in local government. They all say pretty much one thing -- budgets are tight [or worse], property tax revenues haven't nearly recovered, and the taxpayers would bring out the torches and pitchforks if we tried to raise taxes.

Now remember that for most local govts between 60 and 80 percent of their operating budget is payroll related and tell me how the heck they're going to hire new workers. They can barely pay the ones they have now.

My Metro Detroit suburb is a really good budget shape, thanks to good budgeting and never having had a defined pension program. Despite this, the firefighters just signed a new 4-year contract with both no raise and new givebacks.

Anyone who really thinks local govts are going to be hiring additional employees any time soon must be on powerful drugs.