The Austerity Drag

The U.S. economy added 243,000 jobs in January, far surpassing analysts’ expectations of around 155,000 jobs for the month.  As a result, the unemployment rate also unexpectedly ticked down to 8.3 percent for January.

The private sector added 257,000 jobs in January, while public-sector employment dipped another 14,000.

And that last part is important, because it begins to reveal the truly destructive nature of austerity.

Amid the wrong-headed drive to shrink the size of federal, state, and local governments (government employees make up one-sixth of the workforce), private sector job gains have been partially thwarted by the losses of government jobs.

With the release of the jobs data each month, the ever-insightful Steve Benen – who joined The Maddow Blog this week – republishes his two charts showing job losses and gains for each month since the beginning of the Great Recession.

The first chart shows the overall jobs picture, while the second shows the jobs picture for the private sector alone.  My shameless rip-off adaptation of these charts is below. As with Steve’s charts, the red columns show monthly job losses under George W. Bush, while the blue columns show monthly job totals under Barack Obama:


The second chart shows that the private sector has been adding jobs for each of the past 23 months.


Also worth noting: there are more total private-sector jobs today (110.4 million) than in February 2009 (110.3 million), just days after Barack Obama took office.

But I always wanted to see a chart which showed us what was happening in the public sector.

So I took matters into my own hands.  Here’s my own homemade chart showing jobs totals in the public sector since the beginning of the Great Recession:


As I plotted the data, I began to understand why Steve might not show the public-sector data each month: The one-time massive hiring bump (and susequent wind-down) surrounding the 2010 Census dwarfed all of the other changes in the chart, obscuring the other month-to-month changes.

As a result, the chart provided little insight into the fundamentals of public-sector jobs.

Fortunately, the Bureau of Labor Statistics published a press package which isolated hiring for the 2010 Census.  This allowed me to disentangle the one-time effects of the Census from the underlying fundamentals of public sector jobs.

The result is this chart showing monthly job totals in the public sector, excluding the volatile Census hiring data:


In many ways, this public sector chart is the inverse of the private sector one.

At the very moment when the private sector began to recover, at the very moment the economy needed to be firing on all cylinders, at the very moment the government should have leveraged negative real interest rates* to invest in jobs and infrastructure, one-sixth of the economy was (and continues to be) stuck in reverse.

And as austerity economics kicked in, the losses in the public-sector have only deepened, creating significant drag on the economic recovery.

Since Barack Obama took office three years ago, the public sector has shed some 603,000 jobs – averaging roughly 17,000 job losses per month.  (Compare that to the 840,000 public-sector jobs added during George W. Bush’s second term – an 18,000 per month clip.)

Without these public-sector job losses over the past three years, the unemployment rate would stand at 7.9% today instead of 8.3%.

While some might celebrate the wholesale destruction of government jobs, I don’t.

Public sector employees are vital to our economy and to my business.  Many of my customers are teachers, first responders, court personnel, and a wide array of other local and federal government employees. Public employees create better roads and safer neighborhoods and smarter students, all of which benefits my business.

The destruction of public sector jobs negatively affects my business and our economy.  As public sector employees lose their jobs, I lose business.  And the wider economy suffers, as well.

Austerity just doesn’t work.


* A bit of explanation here on “negative real interest rates”: instead of expecting a positive return on government bond investm0ents, investors are now willingly paying to have the federal government hold their money for 5, 7, and 10 years. In essence, investors from around the world will pay us to invest in our jobs and infrastructure – which would, in turn, pay even greater dividends to our economy as we emerge from recession.

Confessions of a Job Creator

I’m a job creator.  And job creators are important.

At least that’s what we’ve been hearing from Republicans lately.

House Speaker John Boehner cited “job creators” and “job creation” 26 times in a speech about the economy last week.

And in that speech, the Speaker invoked us job creators to attack the Republicans’ Unholy Trinity: taxes, regulation, and government spending:

Private-sector job creators of all sizes have been pummeled by decisions made in Washington.

They’ve been slammed by uncertainty from the constant threat of new taxes, out-of-control spending, and unnecessary regulation from a government that is always micromanaging, meddling, and manipulating.

To hear Boehner’s version of events, the government stands as the sole obstacle to us job creators as we valiantly attempt to create more jobs.

Indeed, the entire Republican establishment keeps talking about the special role we job creators play in our fragile economic recovery.

In their “House Republican Plan for America’s Job Creators” – a 10-page, large-type tome [PDF link] about the same length as this blog post – the House Republican leadership repeatedly promise to slash the Unholy Trinity of tax, regulation, and spending.  On Sunday talk shows, more of the same.

If only we job creators paid less money in taxes, Republicans say, we would hire more.

If only we were free from government regulation, we would hire more.

If only we were less concerned about government spending, we would hire more.

As much as I appreciate Republicans’ apparent concern – their willingness to dump money in my pocket, their longing for my freedom to pollute with abandon, their eagerness to drive the nation to the edge of default to keep government spending in check – here’s the thing:

Their efforts won’t help me create a single job.

Not one.

In fact, Republican attacks on taxes, regulation, and spending do quite the opposite, because Republicans are thoroughly wrong on the mechanics of hiring.

I don’t hire because I have extra jingle in my pocket.  I don’t hire because I can avoid complying with some regulation or tax.  I don’t hire because the government is spending less.  I hire because there’s more work to do.

No responsible businessperson is going to hire simply because they have extra money lying around or because they can dump motor oil in the sewer. As generous as I might be, I won’t hire out of charity.

Entrepreneurs hire because they have work to do, and a new employee can help them get that work done.  They hire to help meet demand. And demand is fueled by customers who have money to spend.

And that’s the fallacy of the Republican job creator mythos: Job creators don’t “create” jobs.  Our customers do.

And the evidence proves the Republican fallacy. Taxes are at historic lows [PDF link]. Corporate profits are at record highs. Government spending has collapsed.  These are the very conditions under which, according to Republicans, we job creators should be creating jobs.

But we aren’t.

Despite these supposedly wonderful conditions for job creators, one in six Americans remain unemployed or underemployed. Income and household wealth has stagnated for over a decade. Instead of hiring in this environment, corporations are hoarding record stockpiles of cash in the face of weak demand.

No demand, no jobs.

That’s not to say that we entrepreneurs – let’s just drop the “job creator” garbage – are powerless.  We can foster conditions which promote growth (the right business model, the right service, the right people); but we need customers with a willingness to spend to make our businesses grow and to create an environment where hiring is possible and profitable for us.

Bottom line: Give me money, and I’ll sock it away in the bank.  Give me customers, and I’ll give you jobs.


A Small Business Perspective on Jobs and Tax Cuts


In late July, one of our technicians left our award-winning auto repair shop to return to his hometown.  He has been our only employee to leave since I bought the business over two years ago.

His departure raised a question for us that a lot of small businesses have faced in this economy: Do we accept the risks of hiring a new employee to replace him?

The answer, I think, is instructive for many of the economic and political issues facing our country.


Impatient voters punished Democrats two weeks ago for not giving enough focus to our nation’s sputtering economy after the near-implosion of 2008.

With our nation’s unemployment rate hovering just under 10% (and ‘real’ unemployment much higher), voters sent a clear signal that they want government to focus on creating jobs and growth.

According to the Small Business Administration [PDF Link], small businesses like ours make up 99.7% of employer firms, and account for two-thirds of new job creation.

Both Republicans and Democrats have reiterated the importance of getting small businesses hiring to get our country’s economy moving again.


This week, congress reassembles in the wake of the elections to consider extending temporary tax cuts  implemented under the Bush administration in 2001 and 2003.

Republicans want to extend the entirety of the Bush tax cuts, which would add $5 trillion to the national deficit over the next ten years, and vastly expanded the national debt over the past decade.

Democrats want to extend the tax cuts as well, but would let them expire for the highest-income households which make over $250,000 per year.  The Democratic plan would cost almost $700 billion less than the Republican plan over the next ten years.

Republican leaders claim that giving tax breaks to top earners is critical to generating the new jobs that the economy needs to recover.

Unfortunately, they’re wrong.


Just how would the Republican proposal affect small business jobs? A hypothetical example from my industry might help us get to an answer.

A very healthy auto shop might have annual sales of $1,000,000 – an amount which would put it well into the top 5% of shops nationwide.  If that shop is exceptionally well-run, it might see net profits of 30%, or $300,000.

For those few shop owners in such a fortunate situation, what are the implications of extending the Bush tax cuts for those making more than $250,000?  Under the Republican plan, that shop owner would save an incremental $1,500 in taxes over the Democratic tax cut plan.

As a small business owner, I’d happily take the $1,500.  But such a small amount would give me zero incentive to undertake the much greater expense – and risk – of hiring a new employee.

So while extending the Bush tax cuts would certainly line my pockets, they would do little to encourage me to create jobs in my small business.


Some observers might contend, as incoming House Budget Committee Chairman Paul Ryan did on CNBC yesterday, that most job growth comes from larger “small” businesses and that my example above isn’t really that relevant to job creation.

So let’s pretend, for a moment, that our hypothetical business is actually 10 times as large as the example above: It has annual sales of $10,000,000, and its owners see profits of $3,000,000 per year.

Under the Republican plan, that business owner would save an additional $125,000 in taxes over the Democratic tax cut plan.  Now, this seems like an amount which might let a business hire a couple of additional employees.

But while the tax savings might be enough to hire additional employees, it provides little actual incentive to use that newfound money to hire in an uncertain economic environment.

A tax windfall fails to meet a prudent business owner’s criteria for making a hiring decision. Business owners don’t hire because we have extra money laying around. We don’t hire out of charity. We hire when there is more work to do.

Again, I’d happily take the $125,000.  But I’d also know that a drop of just 1% in my sales – a fairly likely risk in our current economy – would wipe out my tax savings.  If I were that business owner, I’d stash my cash as a hedge against an uncertain economy.  Net effect: no new jobs created.

The criteria for hiring is scalable: Whether a business has $1 million, $10 million, or $100 million in sales, the decision to hire is based on needing employees to meet demand – not on having spare cash supplied by tax cuts.


In my shop, the economic slowdown – coupled with a nearby street closing for almost a year – contributed to a sales decline of over fifteen percent from our record 2008 levels.  The declines would have been worse if not for our solid reputation, our increased community involvement, and our vigorous marketing.

In fact, our business has more customers than ever before; It’s just that each one is investing far less in their cars.  We see a lot more folks putting off needed maintenance and hoping that their cars won’t break down.

And as I look at replacing the technician who left in July, this drop in sales has been my primary consideration.

An extra $1,500 from tax cuts wouldn’t induce me to hire a new technician.  Neither, frankly, would an extra $125,000.

I’ll hire when our core business is better – when there is more work to do – and not just when I have a convenient pile of cash.

And to make our business better, we need more customers with more money – and more willingness to spend.


To encourage small business hiring, policymakers need to encourage spending.  In particular, they need to encourage the kind of spending which reverberates through the economy as that money is spent and respent in the form of wages, further buying, more wages, and – ultimately – hiring.

This respending feedback loop is key to creating enough demand that businesses like mine will start to hire again.  It is key to driving our nation’s self-sustained economic growth.

The fatal flaw of tax cuts for the wealthy is that the cuts don’t foster respending at a scale which drives significant hiring.  As seen in my examples above, a large chunk of each dollar given out in tax cuts to the wealthy is stowed away in savings – thereby stunting the benefits to the economy.

Mark Zandi, Moody’s Chief Economist, has found the same phenomenon in his research (Full PDF Here).

Tax cuts to the rich don’t yield as much overall economic benefit because the wealthy don’t need to (and won’t) spend that money, thus diminishing the virtuous feedback loop.


Government spending which goes to those in need – the poor, the unemployed, state governments – does get respent (often out of necessity) and the feedback loop is much, much stronger than with tax cuts.


If I’m looking at my bank account, the tax cuts seem like a fantastic idea. More money for me!

But if I’m looking at my business, my employees, their families, and my community – I want the government to focus on assisting those in need.  I want the government to encourage buying (especially from small, local businesses).  That’s what will help my business for the long term. That’s what will – ultimately – encourage me to hire.

Lose the tax cuts.  Give me customers instead.