The newly empowered Republicans have big plans to make government smaller, but that could collide with an even more urgent mandate: to create jobs.
Even though the economy is growing, the unemployment rate is stuck at an unacceptably high 9.6 percent. If anything, that's likely to rise—not fall—once Republicans take over the House of Representatives in January. But not because of corporate layoffs or small-business shutdowns. The latest jobs report shows that the private sector is finally doing what it's supposed to, adding 159,000 jobs in the most recent month, and about 1.1 million jobs since the low point at the end of 2009. That's a slow pace of job growth for a recovery that's been underway for a year and a half, but overall it's the first net gain in jobs since May. "The labor market appears to have shifted from first to second gear," writes economist Aaron Smith of Moody's Analytics.
But gains in the private sector are still being offset by losses in another sector: government. And that is likely to contribute to a rising unemployment rate in coming months.
In the most recent month, the government sector shed about 7,000 jobs, almost all of them at the local level. Employment at the state level was stable in the latest report, but overall that trend has been downward, too. So far this year, total employment in state and local government has fallen by about 260,000.
That's a reversal of the trend from the worst months of the recession, when private employment plummeted but government jobs held steady, thanks largely to billions in stimulus funds that flowed out of Washington to states and cities. Those stimulus funds are now running out, with many states and cities making steep cuts to balance their budgets and account for falling tax revenue.
Some economists think Washington needs to pump more stimulus money into the economy, to speed the slow-motion recovery and assure there's not another recession. Despite the latest gains, there are still 14.8 million unemployed Americans, and millions of others who are out of work and so discouraged they're not even looking for a job.
One weak spot in the latest jobs report was a decline in labor force participation, which means more people have decided not to bother looking for a job. If the participation rate had held steady, the unemployment rate would actually have gone up. The Economic Policy Institute, a left-leaning think tank, points out that at the current pace of job growth, it would take 20 years for the unemployment rate to drift back down to 5 percent, which is where it was before the recession began in December 2007.
But more stimulus seems unlikely now that small-government Republicans and Tea Partiers have gained hold of the House. And if they cut spending as aggressively as their rhetoric suggests, it could even worsen the unemployment problem. The unemployment rate is likely to go up no matter what, as more discouraged workers rejoin the workforce, which will drive up the number of those who officially count as unemployed. Moody's expects the unemployment rate to rise above 10 percent once again in 2011, which could trigger a lively debate over whether the Republican ascendancy caused rising joblessness. (It didn't: The unemployment rate was likely to rise no matter who won in the midterms). Job growth is so weak that unemployment will still probably be close to 9 percent by the time of the 2012 elections, two years from now.
Even without fresh cuts by a trigger-happy Congress, job reductions in state and local governments are likely to be one of the biggest drags on the economy over the next couple of years. As the economy recovers, state tax revenue should rise by about 5 percent in 2011, according to Moody's. But that's from severely depressed levels, and it won't be enough to offset the loss of stimulus funds. The Center for Budget and Policy Priorities predicts that 80 percent of the states are likely to face deficits in 2012 and 2013. A few might try to plug the hole with higher taxes, but that will be a tough sell in a weak economy. Most states will slash spending and cut jobs. Since a lot of state spending flows to cities, cuts will intensify at the local level as well.
The federal government has generally been spared job cuts up till now. The federal payroll (excluding temporary workers hired to conduct the 2010 Census) held steady in the latest jobs report, and it's up by about 66,000 positions since the start of the recession. So the federal government remains a fat target for members of Congress eager to hack away. Unless private-sector job growth doubles or triples, however, deliberately cutting any jobs, in any sector, will be risky. If fixing the economy is really the Republicans' top priority, they'll talk about cutting government but wait a few years before wielding the axe.