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There are economic consequences to budget cuts

Berkeley Blog


When it comes to jobs and the economy, not all solutions to the state’s budget shortfall are equal. Most measures designed by well-meaning state leaders to reduce the deficit also will depress employment and economic growth in California. But the magnitude of those impacts will vary significantly – depending on what measures are enacted – and the worst effects can be avoided.

That’s why it’s so important to pay close attention to the different budget proposals being put forward. We’ll all pay a high price if we don’t.

My colleagues Laurel Lucia, Bill Lester and I have modeled the impacts of the governor’s proposed 2010-2011 budget cuts on employment and economic output in the state and found that his cuts only approach would result in the loss of 330,000 full-time-equivalent jobs, boosting the state’s already high unemployment rate by another 1.8 percentage points. The cuts also would cost California families and businesses more than $36 billion in lost economic output, along with $1.9 billion in state and local taxes.

The projected job loss is greater than the total job growth projected by the Legislative Analyst’s Office for 2011.  This analysis was done using full-time equivalent jobs; because many of the human services jobs are part-time, the actual number of people affected would be much greater. In addition, we estimate that 270,000 adults and 123,000 dependent children would also lose job-based health insurance.

The worst of these impacts don’t have to become reality. We found that balancing cuts with $5.4 billion in targeted revenue increases from upper-income households, corporations and a new oil severance tax would save nearly 250,000 jobs – half of them in the private sector – and 18 billion in lost economic output.

The proposal from Assembly Speaker John Pérez released earlier this week, would go even further in avoiding the negative impacts on employment and providing additional stimulus to the economy. Under the Speaker’s proposal the state would essentially borrow the funds needed to balance the budget and pay it back over time through an oil severance tax.

The majority of jobs lost from the Governor’s proposal – 261,000 – would result from $5.4 billion in cuts to major health and human service programs that bring in significant federal matching funds.  This job loss is 15 times greater than the number of jobs that would be lost through an equivalent increase in revenue. Close to one-quarter of the budget savings from cuts to health and human services programs would be negated due to lost state and local tax revenue, the study concluded.

Cuts to CalWORKs, In-Home Supportive Services and health services for low-income populations hurt the economy more than the equivalent amount of revenue increases. That’s because these cuts would result in the loss of $6.8 billion in federal matching funds and take dollars out of the pockets of low-income residents, who are most likely to put them back into the economy immediately.

The effects of cuts in health and social service programs would, of course, go well beyond the impact on jobs and health insurance coverage. Cuts to CalWORKs and child care programs would create barriers for parents to stay in the workforce. Cuts to IHSS are likely to result in a higher number of elderly and disabled residents placed into nursing homes. Cuts to health programs will result in delays in needed care.

Robert Reich responded to our report this way:

It makes as much sense to cut social service programs in an economic downturn as to drill holes in a boat during a flood. As this important analysis makes clear, the governor’s proposed cuts would not only hurt the state’s most vulnerable people at a time when they most need help, the cuts would also harm the economy, hurting all Californians. In order to reduce the debt, it would be far wiser to raise taxes on corporations and the wealthy.

There is another alternative. In fact, as we have seen from the proposals coming out of the Assembly and the Senate this week, there are many. The State has to make a choice.

The report, “The Economic Consequences of Proposed California Budget Cuts,” is online.