Obama Private Sector Doing Fine Comment is Wrongheaded and Out of Touch

President Obama says the private economy is “doing fine” and “doing a good job creating jobs.”  He also said, “the big challenge we have in our economy right now is that state and local government hiring has been going in the wrong direction. [We]'ve seen teacher layoffs, police officers, cops, firefighters are being laid off.”

The President’s opponents rightly pounced on the statement that the private economy was “doing fine” as grossly out of touch with reality. The private sector is the engine of growth, and we are growing at less than two percent. Job growth in the last month was just 69,000, with the unemployment rate ticking up to 8.2%. 

More disconcerting than his finding that the private sector is humming along beautifully, is the claim that the key to sustainable growth is more government jobs. 

Obama noted that 450,000 public employees have been laid off by state and local governments in the last few years. He pointed out that governors and mayors “don't have the same kind of flexibility as the federal government in dealing with fewer revenues coming in.”  

In other words, the states and localities can’t simply borrow more money from China and print up the rest. They actually have to balance their budget. What a novel concept! 

Remarkably, Obama doesn’t even question whether we actually need the 450,000 public employees that were laid off; it’s just a given. Maybe those employees were simply superfluous.  State and local governments went on a spending spree over the past decade as their coffers became flush with cash thanks to increased property tax revenue as the housing bubble grew.  

From 2000 to 2009, state and local government spending grew nearly twice as fast as the private sector. Do we really need 450,000 more police, firemen and teachers? 

In the early 1980s, one government employee served 179 citizens. By 2007, one government employee served fewer than 159 citizens. Spending (in constant dollars) for law enforcement went from $192 in 1982 to $344 in 2007, far outpacing population growth.

Growth in education spending is even starker. Spending on public education has doubled in real terms since the 1980s. In 1980, public schools employed one teacher per 18.7 students, now it’s one per 15.5 students. 

The hiring spree is even worse in the administrative positions, going from one worker per 15 students in 1980 to one per 10 today. Per pupil spending has risen from $6,024 per pupil (in current dollars) to $10,667 today. 

The key to sustainable economic growth is not more government busy work. The private sector is the engine of our economy. Without a vigorous private sector, there’s no tax revenue to pay the salaries of our government workers. 

Government employees don’t spur long term growth. We found this out the hard way after the last stimulus bill of 2009. The federal government gave states $144 billion to help sure up their budgets. 

But this just put off the inevitable. After the federal money ran out, the states found themselves in an even worse fiscal situation. Every additional dollar in federal grants stimulates a permanent increase in state and local taxes or revenues of 33–42 cents.  

States and localities have to raise taxes to account for the higher spending levels, thus decreasing wealth in the private sector. Studies have shown that the 2009 stimulus act created/saved 450,000 government sector jobs, while destroying/forestalling one million private sector jobs. 

Notwithstanding, Obama argues the answer is another round of stimulus for the states and localities. State and local governments should be permitted to continue spending beyond their means, with their debt nationalized. Heck, we already have $16 trillion in debt, what’s a few more hundred billion? 

Of course, we won’t call it a stimulus bill this time around because the term has become politically toxic. The idea has been repackaged as the “American Jobs Act.” Who could object to more American jobs? 

The plan is to give the states and localities another $130 billion to keep those government workers on the job. And when the money runs out in a couple years, the states will come back, hat in hand, and we’ll hear the whole pitch again.