Economists divide on how deeply state layoffs wound economy
When Gov. Dannel P. Malloy’s administration was still developing plans to lay off about 2,000 state workers, the assumption was Connecticut had enjoyed vigorous job growth in 2015, adding almost 27,000 jobs in the public and private sectors combined.
But by the time pink slips went out this month, state labor officials conceded they had badly overestimated the 2015 growth, downgrading it by 55 percent to just 12,200 jobs gained.
So what happens with state layoffs expected to wipe out almost one-sixth of last year’s job growth?
A survey of some of Connecticut’s leading economists offered mixed assessments. While all agreed the end result is nothing good, some argued that one of the chief alternatives to those layoffs – tax hikes – is far worse.
No good choice
“It’s sort of like Hobson’s choice: You’re damed if you do and damned if you don’t,” former Fairfield University economics Professor Edward J. Deak said.
Layoffs tend to have a very focused impact on the economy, striking a relatively small group of the population very hard. By comparison, a tax hike generally is more broad-based, but also can prompt a much larger segment of the population to curb their spending habits, and place just as much of a drag on the economy,” said Deak, who managed the Connecticut economic forecast for the New England Economic Partnership from 1983 through 2015.
The problem, though, is that best medicine to neutralize — or at least mitigate — the pain of those layoffs, is not available right now.
“If you’re growing (almost) 27,000 jobs a year, that means there’s a substantial demand for new workers,” Deak said. “The people who are laid off may have an opportunity to find new work in the private sector. Without vigorous job growth it becomes more difficult.”
Deak also noted that much of the growth Connecticut has enjoyed over the past three years has been in low-paying service jobs. This could translate into a wage cut for many laid-off professional state employees who do find private-sector work in this area.
Laying off state workers also has other spillover effects that aren’t as severe when other budget-balancing moves — such as tax hikes — are ordered, said University of Connecticut economist Fred V. Carstensen.
Layoffs often are associated with a reduction in state services and an overall drop in government productivity, he said. In extreme cases, it could lead to Connecticut’s securing less federal funding.
Carstensen argued there is a tendency, both among legislators and among businesses, to assume that state employee layoffs save much more than they actually do.
According to the nonpartisan state analysts, the net annual savings from nearly 2,000 layoffs is just under $133 million.
That savings, though significant, covers just one-seventh of the state budget deficit projected for the fiscal year beginning July 1. And it fills just 1/15th of the shortfall projected in state finances in 2017-18, the first new fiscal year after the November state elections.
The fastest-growing, larger segments of the state budget involve retirement benefits and payments on bonded debt. And most of the money owed on state pensions involves funds that should have been saved in years past to cover benefits for workers who already have retired.
Layoffs create plenty of economic disruption, Carstensen said, but they don’t provide enough relief to stabilize state finances over the long haul.
“This may well create the permanent fiscal crisis that (Gov. Dannel P. Malloy’s budget director ) Ben Barnes warned us about” after Malloy won re-election in November 2014, Carstensen said.
Unpredictable tax rates shatter business confidence
But two other economists said Connecticut has turned too often to tax increases in recent years. The result has been a scared business community unwilling to create new jobs, invest capital or offer new services because it cannot predict the cost of doing business in the state.
“Nobody wants to see these layoffs, but it is a necessary correction,” said Don Klepper-Smith, an economist with DataCore Partners in New Haven who was chief economic adviser to Gov. M. Jodi Rell. “We have failed to engage ourselves in some degree of fiscal discipline. We have to start living within our means or (businesses) will be leaving en masse because the tax situation has gotten punitive.”
Businesses recall the $1.8 billion tax hike in 2011 that was part of the solution Malloy and the legislature used to close a record-setting state budget deficit, economists said.
But they also took notice last June when previously approved tax cuts worth almost $250 million per year were canceled and replaced with a net tax hike topping $650 million.
Peter Gioia, chief economist for the Connecticut Business and Industry Association, said that while this state has added back less than 80 percent of the jobs lost in the last recession, the nation has recovered them all plus an extra 60 percent.
Massachusetts has restored all of its lost jobs plus another 140 percent.
“Instead of fighting over a diminishing pie, you’ve got to find a formula to grow the pie,” Gioia added. “Until you grow that pie, you are not going to grow tax revenues.”
Perna: CT needs a long-term strategy
“There is no way of getting rid of a budget deficit that is not a drag on the economy,” said Nicholas Perna, chief economist for Webster Bank. “Our real problem is we’ve constantly inflicted short-term pain on the economy without paving the way for any long-term gain.”
Any decision to lay off state workers that is not part of a larger plan to stabilize state finances and support the education, transportation and information technology structures needed to grow the economy long-term will achieve little, he said.
“I imagine people might have to cut back less severely if everybody took a piece of the action” through a tax hike, Perna said. “But people also have the option of avoiding that tax by leaving the state.
“I think more than anything else they just don’t want a piecemeal approach that offers no real evidence that the problem is going to go away.”
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