States that Cut Spending in Wake of Recession Worse Off Today

Berks-Mont News

New analysis could spell bad news for Pennsylvania where big budget cuts were recently enacted

HARRISBURG, PA — The U.S. states that made steep public spending cuts in the wake of the Great Recession have seen weaker economic growth in the years since, according to a new policy brief from the Keystone Research Center.

Budget-cutting states have experienced rising unemployment, fewer new private sector jobs and weaker economic growth than the states that increased spending, according to the policy brief, which was based on research by the Washington D.C.-based Center for American Progress.

The findings could hold bad news for Pennsylvania, where lawmakers and Governor Corbett recently enacted a 2011-12 state budget with deep cuts to education, health care and human services.

As Keystone researchers note, the inflation-adjusted state spending cut for the 2011-12 fiscal year is 4%, and based on the analysis of Center for American Progress economist Adam Hersh, that could translate into a loss of nearly 32,000 jobs.

“The evidence from budget-cutting states is that deep cuts are hampering the economic recovery,” said Stephen Herzenberg, PhD, an economist and Executive Director of the Keystone Research Center. “Rather than heeding this evidence, Pennsylvania lawmakers have made deep cuts that promise economic pain in the months ahead.”

The policy brief examines budget cuts and economic indicators for the three years between the start of the Great Recession in December 2007 and the end of 2010.

During that time period, 24 states cut government spending by an average of 7.5% after adjusting for inflation, while another 25 states increased spending by an average of 11%. (The analysis excludes Alabama due to data problems reported by the National Association of State Budget Offices.)

The states that increased spending enjoyed on average:

0.2 percentage point decrease in the unemployment rate

1.4% increase in private employment

0.5% real economic growth since the start of the recession

In contrast, states that cut spending saw on average:

1 percentage point increase in the unemployment rate

2.1% loss of private employment

2.9% real economic contraction relative to the national economic trend.

While this analysis does not tell us whether the spending cuts caused the negative economic outcomes, it is clear that steep spending cuts are statistically associated with markedly worse economic performance, researchers found.

“The bottom line is this: states that made deep spending cuts are worse off today,” Dr. Herzenberg said.

Pennsylvania has fared better than the nation during the economic downturn, but recent budget cuts could jeopardize that.

The Center for American Progress analysis concluded that every 10% cut in state spending is associated with a loss of 1.6% of private-sector jobs in the state. In Pennsylvania, 1.6% of private employment is just under 79,000 jobs. Based on an inflation-adjusted state spending cut of 4% for the 2011-12 fiscal year, Pennsylvania is at risk of losing nearly 32,000 jobs, the Keystone brief finds.

“To put that in perspective, it’s nearly three times the number of jobs created by core Marcellus Shale industries between late 2007 and 2010,” Dr. Herzenberg said.