Persistent and acute state budget deficits? It’s (still) the economy

Researchers from the UC Berkeley Institute for Research on Labor and Employment released a paper today that shows clearly and persuasively that the state budget crisis that continues to cripple most states has been caused by the bursting of the housing bubble and the persistent recession (and very weak recovery), not as many contend, by the presence of public sector unions.

The authors, labor economist Sylvia Allegretto, Ken Jacobs, and Laurel Lucia, connect the dots: the economy fell off a cliff and unemployment hit double digits, simultaneously increasing demands for state services and decimating state tax systems reliant on income and consumption, and then political opportunists lined up to identify scapegoats for widespread state revenue crises. Allegretto et al.’s paper separates the research data wheat from the political rhetoric chaff.

Step one shows that state and local government employment has remained remarkably consistent over the past 30-plus years, hovering between 14 percent and 15 percent as a share of total non-farm employment. During the recession, it bumped slightly above 15 percent primarily because the denominator, total employment, shrunk dramatically. Can the current acute fiscal distress be blamed on steady public sector employment? Hardly.

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As seen in the map, there is considerable variation between states in the share of total employment comprised of state and local government employees. The states with the largest share of state and local government employees may surprise some – it’s generally not states that are normally associated with “big government.” Moreover, in step two, the authors demonstrate that there is no statistical correlation between higher public union density and share of public sector employment.

Steps three and four show that public sector compensation as a share of state budgets has actually declined over the past two decades, and summarizes new research (including IRLE research, The Truth About Public Employees in California: They are Neither Overpaid Nor Overcompensated) showing that public sector employees are not overcompensated.

Having demonstrated that public sector workers are not to blame for state fiscal woes, the authors drill down to the real cause of state fiscal distress – the bursting of the housing bubble. They find that regardless of public sector union strength, “house price declines [resulting from the bursting of the housing bubble] were, to a large extent, a central reason why state budgets are in such dire straits.”

The real take-away of this paper – “It’s the economy, stupid!” – highlights the path needed to further revive state fiscal conditions. Putting American workers back to work will breathe new life into both income tax revenues and state sales taxes. It’s time to focus on the real crisis facing America, rather than being distracted by so many paper tigers.