AEI’s Aparna Mathur makes the case that a shrinking government sector, even if it drags down GDP data and job numbers, is exactly the correct public policy goal right now. Growing the private sector needs to be the focus. We need to shift resources away from the unproductive public sector toward the more productive private sector. As she notes: “As of January, the unemployment rate for those classified as government workers by the Bureau of Labor Statistics is only 4.2%, compared to 8.6% unemployment in the private sector.” More from Mathur:
Public sector workers, particularly those involved in education, have an important role to play in the economy. In most states, they account for about 14 percent of all jobs. But real economic growth has to start in the other 86 percent of the economy, where most workers earn their living. Indeed, private sector employment is important if even for the simple fact that state and local tax revenues fund public sector salaries.
As of January, the unemployment rate for those classified as government workers by the Bureau of Labor Statistics is only 4.2 percent, compared to 8.6 percent unemployment in the private sector. Clearly, if we care about economic recovery, we should focus our efforts at combating the specter of private sector unemployment. In a study of data from 1939 to 2008 the economist Valerie Ramey concluded that an increase in government spending typically causes private spending to fall significantly.
That should mean that the current recession-driven cuts in public expenditures may be exactly the stimulus needed to get the private sector on the road to recovery.
Oh, and here is the summary from that Ramey paper:
This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.