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OP-ED | The Economics of People, Part I

by Brian O'Shaughnessy | Jul 18, 2013 9:24am
(9) Comments | Commenting has expired
Posted to: Opinion

Following is the first of a three part series that explores the enormous economic value in maximizing the productivity of all Connecticut citizens.

Don’t Make Government Smaller

These are difficult times for government. Everyone appears unhappy. One sensitive issue is the direct cost of government and the total number of state employees. To add complexity, we live in a time when the need for government services is increasing as government revenues are decreasing.

We appear to be between the proverbial rock and hard place. What can we do?

Our state economy requires an overarching economic solution. One very simplistic approach is to make government smaller.  Let’s engage in a simple analysis that examines our state’s job market and economy to determine whether slashing government jobs will help.

For the twenty year period ending 2009, Connecticut had the worst private sector jobs market in the nation.  We managed to lose jobs during a period of extraordinary national growth.Since 2009, we haven’t done better on jobs in a material way. More troubling is our state’s gross domestic product.  I am not an economist, but all the smart folks agree that the best indicator of a state’s economy is represented by the measurement of GDP. This is how much stuff is produced by our economy – both goods and services. 

Recently, the Bureau of Economic Analysis reported that Connecticut was last in economic growth during 2012 and 2011. We are producing less goods and services each year. Our economy is getting smaller. This impacts personal incomes and government revenues. Ok, we have a poor jobs market and a constricting economy. Should we continue to cut government jobs? Absolutely not. 

One reason our economy is smaller is because government is smaller. That certainly seemed to be a mandate from an electorate seeking relief from constant budget deficits—but it is fool’s gold. We have the nation’s worst jobs market and no economic growth. Mindlessly cutting 15 percent of our government workforce would have a devastating impact on our economy. In addition, our state spends $1.3 billion each year to support nonprofit entities that represent 12 percent of the workforce, or over 190,000 people. Government’s role in the job market of our state is everywhere: as an employer, as a direct support and as a policy making entity.
Massive government layoffs are not the solution.

However, business as usual is not an option. Can we maintain the size of government and return to fiscal stability? Yes, in fact we will need a robust government to achieve such a goal.  If you are a “liberal,” you want government to attack root causes. If you are a “conservative” you want the greatest return on investment for taxpayer dollars. Guess what? These are the same approach. The greatest fiscal impact will be generated by addressing root causes and seeking to reduce the conditions that create expense. Both sides of the political spectrum are in violent agreement.

Don’t make government smaller; make it more effective and driven by economic analysis. There are tremendous economic benefits that accrue when our citizens are more productive – and this includes government employees. Change the focus of government to increase economic opportunity and decrease need. This is not a process conducive to a four year election cycle, however, and needs to span administrations and political parties. Government employees are central to our state’s economy as taxpaying citizens and hearty consumers, but we need them working in a manner that generates a better return on investment. 

If government cannot turn its considerable power to enhancing economic opportunity, it will contribute to the facilitation of economic need, because that is what our present portfolio of government investments has produced. 

Our policies of the past 35 years have contributed to the economic issues we see discussed incessantly: (i) poor jobs market, (ii) academic achievement gap, (iii) transformation from a state with income equality to one with great inequality, (iv) extremely high per capita debt, (v) a dramatic increase in poverty indicators, (v) isolated urban areas that are cost centers, (v) large unfunded public liabilities and (vi) an increasing percentage of the budget devoted to debt service. 

Our issues are clearly economic and our responses should be as well. Blindly pursuing policies that generate red ink put private business under. To add to the dilemma, we are borrowing to create these conditions of need. Any good CFO knows you do not fund losses.

Across the country and globe, new tools are developing that help government evaluate taxpayer return on investment. Social impact bonds, pay-for-success contracts and Human Capital Bonds measure and finance the savings generated by successful social services. What does this mean? It means that the economic health of a state is tied to the productivity of its citizens.  Social Innovation Financing is premised on the idea that the more productive we make our citizens, the stronger our state will be economically. This is common sense. The economic benefits that accrue when human beings are more productive can turn our state around.  This is true if our citizens work in government or the private sector.

There is a wave of research that evaluates the increasing economic costs associated with human capital. The University of Chicago has conducted extensive research in this area. Our governor’s creation of the Office of Early Childhood Development is a direct outgrowth of this research.

Fear of criticism and partisanship prevents government from devoting its vast resources to evaluating how we can spend a diminishing pool of public funds more efficiently to address increasingly complex needs.Tell government employees that the jobs are safe, but different. Families in poverty, hedge fund managers and government employees all want the same thing: to lead productive lives. We should encourage this basic human instinct any way we can. 
The truth is that we need government because no one else can do the job.

Brian O’Shaughnessy of New Haven is a principal in the firm Community Impact Strategies Ltd.

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(9) Comments

posted by: Matt W. | July 18, 2013  10:45am

Matt W.

I agree with some of what you’ve said but the premise is completely ridiculous. Government does not create jobs. It creates incentives. Connecticut has foolishly, through intentional an unintentional acts, created disincentives to hiring and economic expansion.  I don’t think that anyone believes that “mindlessly cutting 15% of our government workforce” is going to resolve this. (Incidentally, I wouldn’t advocate that we do anything mindlessly.) But the idea that we are somehow stuck paying in perpetuity for an employee who was hired as the result of mismanagement or ill-conceived legislation is precisely the attitude that created the problem. 

The basic contract that citizens make with their government is that in exchange for tax revenue the government will provide goods and services for the common benefit without profit. CT has violated this agreement by failing to return fair value for what the citizens have produced, fleecing the treasury with outrageous employee contracts and then it took it a step further by actively creating disincentives to economic development through regulation and taxation.  Resolving the problem requires the several levels of government recognizing that they exist to serve the people and to help facilitate business which is 180 degrees from the arrogance and hubris I see coming out of Hartford.  This isn’t rocket science. There are 49 other examples out there who are doing it better than we are.  Pick one and follow it.

posted by: ASTANVET | July 18, 2013  11:32am

woah, slow down the train for a second… that sounded a lot like a bidenism “spending more to get out of debt” kind of article.  If the author could reconcile one thing he would see that this approach is doomed for failure.  Government is not run on economic analysis - it is run on politics.  Politics costs money - our money, tax money.  The failure of our State is in its failure to be competitive.  We didn’t bemoan the loss of manufacturing as those were ‘dirty’ jobs - we did not cry at the loss of the textile industry as those were ‘east of the river’ jobs.  Over the last 50 years we have tipped the economy from production to service which is to say we are completely reliant on tourism, gambling and the people who drive through our state (but don’t want to buy gas) on their way to the cape.  Competitiveness is not something that you can relax on - so how do we rate on competitiveness.  We have an 8.9% unemployment (higher than the national average) - or to put it another way, we have a surplus of labor.  We are ranked one of the worst (bottom five) for retirement and taxation.  We are ranked as one of the most regulatory states (regulations cost money from the economy in production and compliance costs - not to mention the fines for non compliance).  Governor Malloy likes to point out that ‘we aren’t nearly as bad as New York or Mass” - but that is a fools statement without the recognition that we are a mobile society.  So the answer is to continue to have a ‘robust’ government??? Are you kidding me?  The very institution that put us here.  The “demand and need” for government services is at an all time high??? Why is that?  At every turn we look to government in this state.  The government our benevolent masters will solve my wage issue, my sick time issue, my energy cost issue, my education cost sharing issue, my health care, my insurance, my neighbors dog.  So what if we are taxed, regulated, and permitted for everything we do with maybe the exception of breathing, but that’s a greenhouse gas, so I’m sure that’s coming too.  I would say that the Non- Profits are providing services exponentially cheaper than the State used to and providing infinitely better services.  Look to the non-profit model after you pass the mandatory overtime State Trooper on the highway construction site, who is there because of a statute written years ago to buy votes.  Tell me we cant do things more efficiently without government again… what a joke.

posted by: JamesBronsdon | July 18, 2013  2:16pm

“These are difficult times for government.” You lost me there, first sentence. These are difficult times for INDIVIDUALS, and not the least of their difficulties is the government’s intrusiveness, reach, cost, disregard of the constitution and laws, attention to selfish special interests, and (especially in Conn.) its total concern with self-perpetuation and aggrandizement with no regard to public benefit or interests. The premise of the article seems to be that the government is something that needs to be supported for its own sake, as if it had its own dignity and merit. Sorry, the government is an artificial construct to serve individuals/citizens. So, forgive me if I don’t shed any tears for government. Less would be better.

posted by: Greg | July 18, 2013  4:51pm

Without repeating what Matt W and ASTANVET said, as they said it beautifully, I have two questions to ask in response to this article:
1. Which honest, pragmatic, self-sacrificing, and diplomatic legislator(s) will be stepping up to be the bannerman for this robust and highly efficient government?

2. Who is going to pay for this, if the goal is to expand state government and not shrink it?

Re: #1- Look at the behaviour of the last legislative session: bills drafted in secret and passed without debate, the misuse of e-cert in violation of CT statutes governing legislative procedure, implementing GAAP but not really GAAP, raiding the transportation fund to plug the general fund hole (and Malloy subsequently crying about how there’s no money for transportation), again borrowing to fill the general fund hole, Toni Harp declaring “the legislature didn’t pass the constitutional spending cap, thus the legislature is not bound by it”.  Citizens of CT CANNOT TRUST THEIR LEGISLATORS to operate and legislate by the rules, nevermind actually solve problems and make the state more efficient. Someone will need to step forward, rally a coalition and lead…but out of this crop of legislators who show nothing but contempt for the residents of this state? I doubt it.

re: #2- As we all know, the 50 states don’t have a Federal Reserve willing to hit Ctrl-P to print money,  buy debt, and perpetually fund deficits as does Washington DC.  CT has funding constraints by both law and by structure, there is no magic bullet to solving the funding issues we have in a period of economic stagnation and declining tax revenues, hard choices eventually need to be made. Debt has constraints for families, businesses, and yes the state of CT…the country just went through a financial crisis fueled by excessive debt (google the Minsky Debt Cycle for the economic framework), and each additional dollar of debt gets us closer to an inevitable breaking point.

CT chose it’s path over the past 20-30 years and repeatedly failed to adapt to a changing economy; the voters of CT chose their legislators and in turn chose to make CT an onerous place to live and do business. There’s nobody else to blame when the rest of the country can manage to do better than us in perpetuity.  Quite frankly, I can find myself being agreeable to the plan outlined above of making governemnt more efficient and value driven, but forgive me when I take a look around CTNJ and the Courant and read how the legislature operates by its own rules with blatent disregard for both the law and their fiduciary duty, repeatedly elected into office by the very constituents they screw over time after time.  In theory, interesting and perhaps a great idea, but until the legislature starts actually representing the people who elect them I’ll stick with the “shrink government and lower my taxes” crowd.

posted by: BrianO | July 19, 2013  8:43am

Hard to respond because I am not sure of the comments.  If you think my premise is that Government “creates” jobs, then you are mistaken.  Nowhere did I say that.  However, between full time equivalent employees and the non-profits our state funds, there are at least 250,000 citizens whose employment depends on the state, and we should expect a better return on investment.  You can fund a keg party or your child’s education.  One is a good investment, one is not.  Chronic budget deficits and increasingly negative results means we need to reevaluate our investments.  The incentives of government can be very successful if correctly designed and monitored.  This should be a bi-partisan concern.

posted by: Nutmeg87 | July 19, 2013  9:31am

Brian - This is probably the best written article that I’ve seen in quite a while… 

I dont agree with you totally in your final assessment that “..we need government because no one else can do the job.”  However, your assessment of the SORRY STATE OF AFFAIRS IN CONNECTICUT was very well done…

Recent history does prove that pure laissez-faire economics will create extremes that collectively no one wants to produce; hence, Keynesian economics still rule as our best means to manage the peaks & valleys of economic cycles.  Long-term growth = standard of living.  The best LT Growth is mathematically achieved when you reduce volatility (standard deviation) in calc compounded growth of GDP in LT.  So govt intervention to minimize peaks & valleys certainly contributes to our betterment…

The problem managing a small state like CT that DOES NOT HAVE THE ECONOMIC DIVERSITY OF A NATION (or small nation), it is very difficult to use Keynesian economics… 

Matt - Govt. fortuntaely does create jobs…  Look at our municipalities…  The OVERHANG of pension liabilities is a reminder that there is a legacy of govt jobs…  All the stories I read that call for more Social Services, Infrastructure buildout, Modernize govt, create new departments to regulate guns, etc….  This is all GOVT spending & govt employment at the city/town levels that State also subsidizes…

The legacy of poor mgmt, unchecked politics of a Democrat majority in Hartford and plain mediocre at-best leadership has run CT to the basement of 50 states…

DETROIT bankruptcy should linger in our minds as we look to November elections…  The wealthy will continue to leave CT and the middle class will hold the bag of the State that has the LARGEST DEBT/CITIZEN in the COUNTRY….

posted by: BrianO | July 21, 2013  10:00am

Lots of emotion about things I did not say.

Government’s role in job creation is complex and multi-layered.  It creates jobs directly and incents business in innumerable ways.  It can also be fleeced in the process. 
The manner in which public funds are spent is not growing our economy. This results in less money and more problems and is a dangerous cycle. 

Spend the public’s funds more effectively because economic development and social services are the same “thing.”  Measure the economic results of our public investments.  That’s all I said.  I didn’t say grow anything.  Start the process of analyzing the return on all public investments.  It will be a 30 year journey that will take us back to a better time.

posted by: JamesBronsdon | July 21, 2013  3:00pm

Perhaps a more respectful response would be that you disagree with our reasoning. Characterizing our reactions as “emotion” seems rather dismissive.

posted by: BrianO | July 21, 2013  4:37pm

James:

I agree with most of what is said and emotion is good.  I do not propose more government investment is all I am saying.  The venting is healthy.  I am as frustrated as anyone with how we spend public funds.

If I was dismissive, I apologize.