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Does the Government Really Need More Help Than the Private Sector?


Does the Government Really Need More Help Than the Private Sector?

June 14, 2012

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Much has already been said and written about President Obama’s statements of last Friday that, “The private sector is doing fine. Where we're seeing weaknesses in our economy have to do with state and local government.” I am disinclined to critique the President’s choice of words, which are routinely scrutinized to a degree that very few of us could withstand. I am nevertheless reminded of Michael Kinsley’s definition of a gaffe as being when a politician accidentally tells the truth – or, in this instance, what he believes to be true.

President Obama’s comment did not come out of thin air. For several months many policy advocates have argued that government cutbacks are hampering economic recovery and that the federal government should provide more aid to States and localities. The President’s statement signals that he has internalized this view. This policy view is important – more important than an inartful choice of words – because it pertains to a fundamental disagreement about the appropriate roles of the private and public sectors in our economy.

In recent months several left-of-center economics blogs have presented graphs somewhat similar to one reproduced below from Joe Wiesenthal at Business Insider.

At first glance this graph appears to substantiate President Obama’s remarks – that the private sector is doing much better than the public sector. Underneath the graph Wiesenthal states, “Note we’re not making any conclusions. Just showing the data.”

But how one presents the data can have a strong impact on how it is received. Three elements of the above graph could well distort the reader’s reaction to it. First, this is a two-axis graph, in which the scale of the private sector is compressed to seem comparable to the public sector, despite the reality that the private sector is five times as large. Second, although the graph appears at first to compare relative public and private employment to the situation in early 2009, it really doesn’t. The January 2009 starting point for private-sector employment on this graph is placed visually higher than the starting point for public-sector employment. A more accurate graph would look like this:

Third and most importantly, this graph begins in January 2009. This is critical because the decline in private-sector employment started after January 2008, and was most rapid in that year. While President Obama faces greater political accountability for events since he took office, from an economic standpoint there is no intrinsic reason to start with 2009. Quite the opposite, because looking only from 2009 onward produces a misleading picture by leaving out the critical pre-2009 decline in private employment.

To illustrate this, consider the same data when viewed from two other starting dates. I’ll also add a third line for total US employment. Here is how employment has changed since January 2008:

And here is how it has changed since January 2006:

The additional context provided by these pictures suggests that the public sector workforce has actually been, relative to the private sector, largely shielded from the recession. It is almost inevitable that the post-2010 jobs recovery would occur in the private sector because, after all, that’s where all the pain was.

One can quite easily argue that the past few months represent not only a natural but a desirable correction – a belated movement from public-sector employment into private-sector employment, restoring some equilibrium that had been disrupted by the recent recession. If on the other hand one sees a given level of government-supported employment as intrinsically desirable, one is more likely to look at recent trends with alarm.

The current debate reveals that policy makers are divided on the roles they would assign to the private and public sectors. It is natural, for example, for public employee representatives to see the recent decline in government-supported employment as a problem in and of itself; some other left-of-center advocates appear to be sympathetic to this view.

That vantage point is reflected in statements like those of Vice President Biden, arguing for increased federal support to state governments by referencing sympathetic constituencies like teachers, police and firefighters. The position is further reflected in the Administration’s continued push for federal bailout funds for state governments. Left-of-center thinkers also often express a broader view that taxpayers will in the future need to contribute more tax revenue to ensure that government can function as desired. In short, this viewpoint generally holds that the private sector needs to do more to support the public sector.

An opposing viewpoint is expressed by some right-of-center proponents, including Governors Scott Walker and Chris Christie. They argue that the public sector should be trying to alleviate the burdens of the private sector rather than the other way around.

These advocates argue for restraining the growth of government so that the private sector is not ultimately required to make disproportionate further sacrifices in the form of higher taxes. They argue, echoing Ronald Reagan, that the problem isn’t that the private sector has lived too well, it’s that government has been living better than ordinary Americans have been. These governors have come under rhetorical fire from some public employee advocates and from some elected officials who have come to speak for those government employees’ interests.

Left-of-center advocates will sometimes argue that the interests of the private and the public sector are complementary – that greater spending by states and localities will fuel economic recovery in the private sector as well. Their frequent comparisons of private-sector and public-sector workforce sizes, however, appear to reflect a zero-sum mindset about the relative importance of the public and private sectors. From a right-of-center viewpoint there is no inherent problem if the private sector begins to grow faster than the public sector. But some left-of-center thinkers react with concern to any such trend, even when it simply reflects the private sector belatedly recovering from a painful ordeal.

There is little disagreement on the facts. There is no question that the public sector is now experiencing fiscal constraints from which it was earlier protected, both during the recession as well as during the subsequent government spending surge. There is also no question that the private sector was hit far harder by the recession itself, and that it has still not fully recovered.

The basic argument is this: should the public sector be given more relief – for which taxpayers must ultimately pay -- or should we be trying instead to relieve the private sector of part of the accumulating bill for record public-sector spending? Specifically with respect to jobs, should our aim be to enable government to maintain recent levels of employment, or should we instead focus on enabling the private sector to recover and return to prior levels of employment? In short, should elected officials treat the government sector or the private sector as their principal client interest?

These are fundamental economic policy questions that are likely to grow more salient in the months to come.

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.

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