Explaining Southern California's economy

Why this recovery is different for state and local workers

California Budget

Rich Pedroncelli/AP

Gov. Jerry Brown discusses the cuts he has already made to help reduce the state's budget deficit. For the state to get its financial house in order, it will need to cut workers, reversing a hiring trend that has taken place in previous recoveries.

At the New York Times' Economix blog, Ben Polak and Peter K. Schott, both of Yale, have written a "Duh, so that's the problem!" post about what they're calling America's "hidden austerity" program. In case you've been on an extended vacation, "austerity" is shorthand for cutbacks in government spending, versus throwing money at various debt and banking crises. Greece, for example, has been suffering through austerity as a condition of the bailouts it's received from the European financial authorities.

In the U.S., we're theoretically not yet engaged in official austerity. We're in more of an in-between phase, with the stimulus packages of 2009 in the rear-view mirror and the potential for deficit-cutting and tax cuts on the horizon. 

Polak and Schott argue that austerity has already arrived, however, in the form of reductions in workers at the state and local level. Neither has recovered at a pace that resembles previous bounce-backs from recessions. This trend is particularly evident in California, where a state-level hiring freeze has been in effect since last year (there have been some workarounds, but there you have it).

You might think this is all just a question of revenues matching up with expenses. Just wait until the recovery really gets going, and then California's multi-billion-dollar budget deficit will fade away. But according to Polack and Schott, maybe not:

Why is this happening? One possibility is that we are witnessing a secular change in state and local politics, with voters no longer willing to pay for an ever-larger work force. An alternative explanation is that even though many state and local governments are constrained not to run deficits, they can muddle through a standard recession without cutting jobs. But when hit by a huge recession like that of 1981 or the latest one, the usual mix of creative accounting and shifting in capital expenditures cannot absorb the shock, and jobs have to go.

California's financial woes are making the state look more and more like a European-style sovereign every day. We have the world's ninth largest economy, after all — if a U.S. state could be compared to a country. We're right behind Italy. Which puts us ahead of Spain and Greece. And we know how things have been going for those nations. Is California too big to fail? If things keep going the way they are, we may find out.

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