Why a shrinking government is bad news

Many Americans want a smaller public sector, but one of the biggest weaknesses in the economy is the ongoing loss of government jobs.

By MSNMoney partner May 4, 2012 12:40PM
By Rick Newman

Americans generally want smaller government, and the lower taxes that go with it. They're starting to get their wish—but it spells trouble for the broader economy.

The latest jobs data shows that the private sector added 130,000 jobs in April, while the government sector lost 15,000, for a net gain of 115,000 jobs. The longer-term trend is more stark. Since the start of 2011, the private sector has added 2.8 million jobs, while government has shed 280,000 jobs.

On the whole, this may be a fitting realignment for an economy that got too dependent on public spending. But the economy is also beginning to suffer withdrawal symptoms from shrinking government that are causing collateral damage elsewhere. The loss of government jobs in April contributed to a discouraging jobs report, which could have a lasting effect on the economy. The weak report "has increased concerns that growth in the U.S. economy is slowing down," writes Dick Green of Briefing Research. "The associated anxiety may create a cautious undertone to market sentiment that could take months to dispel."

A bigger issue that economists are starting to worry about is that much sharper public-sector cutbacks are coming toward the end of this year, and especially in 2013. Most of the government jobs lost so far have been at the state and local level, as states and cities have cut spending on teachers, public safety, and other types of services to cope with falling tax revenue. The federal stimulus money appropriated in 2009—which plugged a lot of holes at the state and local levels--has mostly run out as well, with tax revenues not rebounding strongly enough yet to make up the shortfall.

State and local cutbacks, however, are mild compared to what's supposed to happen at the federal level. The Bush-era tax cuts, for one thing, expire at the end of the year, and if they're not extended, most Americans will endure sudden, punishing tax hikes.

Most analysts expect a last-minute extension, but that might require offsetting cuts in other types of government spending in order to keep the national debt from growing even more than it already is. Such spending cuts would come on top of nearly $1 trillion worth of cuts already scheduled to kick in starting in 2013.

Those spending cuts are just what Tea Party activists and small-government advocates want. But shrinking government, while the economy is weak, can be like delicate surgery, with a lot of damage possible if the scalpel slips. If all of the measures on the table were to go into effect, for example, economist say it could cut three to six percentage points off of GDP growth—which would instantly induce a recession. This is the "fiscal cliff" that Federal Reserve Chairman Ben Bernanke and others have warned about. "I'm very worried," said Citigroup chief economist Willem Buiter at the recent Milken Institute conference in Los Angeles. "I see complete paralysis."

Republican presidential front-runner Mitt Romney has suggested that he'd take an ax to the federal bureaucracy, killing some agencies and shrinking others. But the problem with the federal government isn't really the size of the workforce. Over the last 10 years, for example, the federal workforce has grown by only 2.3 percent, which is a bit more than the private sector has grown, but far less than the nation's population growth. The real problem is the explosive growth of entitlement spending, especially on Medicare and Social Security, which for the most part doesn't require any extra workers.

But Medicare and Social Security are popular programs that will be very hard to cut back. So for now, politicians are targeting cutbacks in the federal workforce, which is an easier sell to voters. As long as they don't look too far into the future.

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32Comments
May 7, 2012 6:36AM
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Just call it the way it is.... too many sorry check drawers getting paid not to work....I don't mean those who have retired and are actually entitled to be drawing... its the ones here illegal ... the ones who get checks for being uneducated... deaf in one ear... blind in one eye....shoulder hurts.... the ones that are able to work and do something and dont..... My friend is a quad. cant walk... cant dress himself.... but yets still works a full time job... pays taxes and his employees people to get him dressed for work... and to do odd jobs.... so If this man can do this on a 50,000 a year salary... don't tell me others aren't milking the system.... Sorry people out here having kids to draw a check.... free health care.... free cell phones... free clothes... free gas.... help on getting cars..... ITS A JOKE TO WORK ANYMORE TO PAY FOR THIS CRAP!!!  Cut these sorry pill head check drawers off.. let the starve.... AGAIN... NOT THE ONES THAT HAVE PAID INTO THE SYSTEM AND ACTUALLY ARE ENTITLED... JUST THOSE THAT ARE ABUSING THE LAWS AND ARE ABLE TO WORK AND WONT!!!!!
May 5, 2012 8:08PM
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this is just liberal msn propaganda peddling to the lazy and ignorant.  scaring them that the huge increase of the number of people on welfare under Obama will end.  well...it should!  get a job and start contributing something to the system other than bastard children all with a different Baby Daddy...
May 4, 2012 1:12PM
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A while back my ex worked as a civilian in a military comptroller's department and she told me something that, if widespread, certainly needs to be addressed by an astute administration. The department heads told everyone to make sure they got requisitions in before the end of the fiscal year. They were also told that if the money was not spent, there would be budget reductions the next year. One of the items that money was spent on was a Persian rug for the Commanding Officer's office. A government wide freeze on unnecessary spending with severe consequences is in order. We might actually see spending take a huge dip.
May 7, 2012 8:52AM
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Another problem is the millions in entitlement checks being sent out of the country so nothing is even going back into our economy.There should be a requirement to stay in the country to remain eligible.  Also now is not the time for the "Dream  Act" where illegal aliens get a basically free college education with there full tuition paid when kids who are citizens are trying to pay for their college loans by working at Mcdonalds Illegal alien entitlement and abuse of the system must be addressed now as well...

May 6, 2012 11:40AM
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Generally government is the most inefficient organization going.  Any where there is government spending there is waste and fraud.  Government does not have any resources to employ other than taking resources from the private sector which is the engine to economic growth.  Government growth equals less private sector growth and less private sector growth equals less economic growth in the long run.

May 4, 2012 10:01PM
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Shrinking government is bad news, certainly, if you are a socialist.  For the rest of us, we got along just fine with the smaller governments of previous administrations.  Govt spending above 18% of GDP is wasetful and harmful to the private sector, which by the way, is where the money that runs the govt comes from in the first place.
May 4, 2012 5:27PM
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The idea that you should not cut government jobs because it will "harm" the economy is just idiocy. You cannot have a successful economy in the long-term that is based largely upon permanent government employment.  Someone else has to be taxed to pay the salaries of all these government workers, or else the money has to be borrowed.  You grow the economy through private sector employment where something of value is actually produced (goods or services) that can be sold at a profit, thus resulting in tax revenue on the profits made.  The profits then allow the private sector to expand its operations, hiring additional workers.
May 5, 2012 9:32AM
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The goverment has 100 people doing a 2 person job. they need to shrink and these people need to find real jobs. Government employee benifits is killing this country worse than private union benifts. Big government means big taxpayer cost. just look at our current situation.. What this artical is not showing is how the goverment under osam bin presidente has almost doubled. so show me the numbers under the previous 2 presidents and our current dictator.
May 6, 2012 11:51AM
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Pay checks and benefits are small potatoes in the overall spending picture. It's not the actual spend, but how it is spent. We should shut down our bases in places like S. Korea, Germany, etc. It will be screamed by some pundits about a loss of JOBS. Not if it handled right. The money spent in those countries is NOT spent here. Close them, build new bases here on our borders. Spend the money here. It will be taxed here. The increased revenue stream allows for real infrastructure work {i.e. taxes, jobs, sales, ect] right here at home. Why do we need to be an Empire to the world. History shows they ALL collapse.
May 4, 2012 9:32PM
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Yyou cannot pay enuogh taxes to pay your own salary. Every one cannot work for the goverment.
May 7, 2012 1:48PM
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You stupid people pull your head out.  Get people out of gevernment jobs and put them in private sector jobs.  Half the crap the Feds do is unnecessary and is a drain on the american taxpayer.  Get these people into the private sector and have them contribute to society instead of being a bottomless pit.
May 5, 2012 8:31AM
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Federal Bureau of Labor Statistics found that the average state/local government worker earns $40.10 an hour in salary and benefits. Average!!!

 

guess what federal employees make??

much more....and guess who gave them a pay raise 2 years during recession ????
Obuma....don't say u didn't cause U signed it......

May 5, 2012 8:30AM
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the post office is an example of pensions and health care benefits out of control....the health care costs by the postal service has crippled it....and we are bailing them OUT at this moment....ALL employees need to pay more for their health care ...Government , postal and public sector employees....
May 5, 2012 8:32AM
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plus all the administrative costs to administer these massive Government and public sector retirement and health care is ENORMOUS for the taxpayer to pay...."
May 5, 2012 1:52AM
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Rick Newman writes the federal workforce has only grown by 2.3% over the last 10 years. I think

the part that is missing is the average wage and entitlements of government workers. Twenty years

ago the average government worker made 70 cents on the dollar of the same job in the private sector. Now the government worker makes a little more on average, plus the benifits, health insurance, life insurance, 13 sick days a year, 20 days of vacation after a few years, and the retirement plans . Not to mention parties in Vegas! That is where all the growth in employee costs come from. Scale that back to what we get in the private sector and you can keep your job. I am paying for a government employee to have a better retirement plan than mine... just ain't right.

May 8, 2012 10:54AM
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Our forefathers are rolling over in their graves because goverment is so big.

They faught and died to prevent big goverment and TAXES!

Chip

May 5, 2012 8:30AM
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Public sector  and Government needs OUT of retirement business....ALL employees need to pay into their own retirement system like all private sector workers do... this needs to be accomplished IMMEDIATELY....the old retirement systems are straining the taxpayer....
May 5, 2012 12:24PM
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This doom and gloom about budget cuts. Bull. Cutting Medicare and SS, BULL. CUT DEFENSE. Why in the hell do we need our EMPIRE to have bases in South Korea, Germany, etc, etc. The money earned at those bases is spent in THOSE COUNTRIES. Does anyone not think rebuilding our infrastructure will not cause people to buy cars, bulldozers, boats, houses, generate taxes. For crying out loud some needs to step up or start shooting!
May 4, 2012 4:35PM
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Pro-Obama liberal news media at it again. Socialism is the end of a civilization, not its beginning.
May 5, 2012 8:54PM
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One small part they forget.  After afghanistan ends and the troops come home, the govt will not need all the beans and bullets it provides now borrowing money to do so.  the defense spending will be cut drastically due to one major factor.  An infantry soldier fires hundreds of rounds in combat.  At fort bragg they fire about 200 a year for qualification.  add in all the other things the govt has to buy and they will end. 

now the dems are smart and have not stopped the war as the spending is keeping the wolf from the door but the door will open same as it did after viet nam, (1975-1980 recession for the same reason a stop in the govt spending).  except we are already in a recession.  so it is going to be worse.

Defense stocks underperformed the market 30%-40%.  If you dont believe me look it up its history.

the same mess is coming around again.  probably about 1 year after afghanistan ends.

If washington does not contain the spending, and doing so is going to hurt defense contractors, govt contractors, and also there will be a loss of gs fed jobs. same as before.

 

Wheres the money gone?  Each person that owns a car has lost $2700 a year out of their paychecks paying for $3.60 a gallon gas.  A depot near me is already laying off 1,000 contractors with more to come.  a tank track company in town has already closed one location and layed off 240 workers.  Its starting and unfortunately nobody seems to see it. 

So before it hits pull your money, stocks will be dirt cheap in 2016.

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