Heritage Assesses the Ever-Expanding Ever-Centralizing Federal Government Sector

In a graphically interesting discussion of the April employment situation release, James Sherk and Salim Furth write:

State and local governments avoided the massive job losses of 2008 and 2009 that affected the private sector—these governments even grew slightly during the recession. But they have been gradually downsizing ever since. The federal government, by contrast, has expanded rapidly since the recession began. Federal employment, excluding the U.S. Postal Service,[2] peaked in 2011 at 13 percent above 2008 levels. At the same time, the private sector was still mired in the slow recovery, 5.5 percent below 2008 levels. Since 2011, federal expansion has stopped, and a fifth of the recession-era expansion has been reversed.

However, most of the federal employment expansion that took place from 2008 to 2011 remains in place. Despite protestations that the additional employment associated with the stimulus would be temporary, federal employment remains as high as it was three years ago and 10 percent higher than it was before the recession. By contrast, private, state, and local employment are 2 percent to 3 percent below pre-recession levels.

The authors use the below figure to illustrate these points.

ib3927_chart2_600.gifHere I provide two other ways of examining the data. Figure 1 below depicts employment levelsnormalized to 2007M12 levels.

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Figure 1: Private employment (blue), Federal ex.-postal service (red), and state and local employment (orange), in 000’s relative to 2007M12. Federal series excludes temporary Census workers. Source: April 2013 employment release.Now, it is interesting to observe that should one not exclude postal workers (after all, many other Federal workers are distributed throughout the nation, just like postal workers), then the picture changes somewhat, as shown in Figure 2.

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Figure 2: Private employment (blue), Federal (red), and state and local employment (orange), in 000’s relative to 2007M12. Federal series excludes temporary Census workers. Source: April 2013 employment release.In other words, Federal employment is essentially back to levels of 2007M12. I think these two graphs cast in a slightly different light the authors’ main contention, viz.:

…The expansion of the federal government has ultimately come to some degree at the expense of states and localities. As the federal government seeks to command more of the economy—most notably the health care sector—this troubling trend is likely to continue to move employment and power to the least transparent and accountable level of government

I guess it is an expansion of the center if the non-center shrinks. (Music side note: I almost expected the Darth Vader theme!)

Finally, I find it interesting that Sherk and Furth do not mention how little government employment grew relative to previous episodes.

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Figure 3: Log government employment (ex.-census workers) relative to 2007M12 trough (blue), relative to 2001M03 trough (red), and relative to 1990M08 trough (green). Source: BLS, and author’s calculations.As I recall, George W. Bush was President during the 2001M01-2008M12, when government employment surged. I do not recall a similar concern about centralization of power on the part of Heritage Foundation economists at the time.

In absolute terms, the change in government employment is 1.6 and 1.5 million lower in the current episode relative to the 2001M03 and 1990M08 episodes, respectively. Interestingly, this figure is very close to the 1.4 million that Chinn, Ferrara and Mignon (2013) identify as the structural change in total nonfarm payroll employment not attributable to misprediction in private employment; i.e., a good chunk of the low employment growth is directly attributable in a mechanical sense to the unique negative trend in government employment. (If you thought the previous two episodes were anomalies, see WSJ RTE.)

In my view, the NY Times assessment by Nelson Schwartz better summarizes matters:

“The drag from the government sector is quite substantial,” said Gregory Daco, senior principal economist at IHS Global Insight. “Given the fiscal headwinds, the private sector is doing O.K.”

“If it weren’t for the government, the economy would be stronger,” said Mr. Daco, citing the spending cuts hitting now, as well as the higher Social Security deductions for all workers and increased income taxes for top earners that began in January.

See this post for a discussion of Messrs. Sherk and Furth’s previous interpretation of employment statistics.

This piece is cross-posted from Econbrowser with permission.