Commentary | Jobs and Unemployment

Grants to state and local governments would boost employment

Congressman Keith Ellison (D—Minn.) has introduced the Put America to Work Act of 2011, which would provide grants to states, local governments, and Native American tribes in order to stem job losses and create new jobs. This proposal would help ease the state and local budget crises as relief funding from the 2009 Recovery Act phases out. This aid would maintain vital services for distressed communities as well as provide an economic boost that would put over two million Americans back to work.

The act would authorize the appropriation of up to $200 billion in budget authority for fiscal year 2012 and $150 billion for 2013, sums large enough to noticeably turn the dial on job creation in the right direction.  Up to 5% of appropriations would be designated for Native American tribes, up to 30% would be allocated to state governments, and the remainder would go to municipal governments. State and local government fiscal relief has been demonstrated to be a very efficient job-creation strategy. Moody’s Analytics chief economist Mark Zandi estimates that every dollar in general aid to state governments generates roughly $1.37 in economic activity, a better economic return than results from a payroll tax holiday ($1.24) and considerably more effective than permanent income tax cuts ($0.35).

Funding would immediately be provided for repairing and painting schools, community centers, and libraries; maintaining parks, playgrounds, and public spaces; expanding emergency food programs; staffing Head Start, child care, and early childhood education programs; and restoring or revitalizing abandoned or vacant properties in natural disaster- and foreclosure-affected areas. Funds would also be made available for child care, health care, and education services; energy efficiency retrofits; and youth employment and job training programs. The act also requires that at least 85% of all grant funding go to wages, benefits, and support services, such as child care.

This act is well-timed. The United States is still mired in a sweeping jobs crisis, and state and local government budget cuts represent a significant headwind blowing against a stronger recovery. In May, local government employment fell by 28,000, bringing total job losses in this sector to 446,000 since employment peaked in September 2008. Over just the last year, local governments have shed 267,000 jobs, and state governments have lost 24,000 jobs. Bringing the unemployment rate back to pre-recession levels would currently require putting 11 million Americans back to work, which will take many years even without the counter-productive federal budget cuts that look increasingly likely in the near-term. Putting public servants back to work and hiring individuals for public works projects in distressed communities would be an excellent way to pursue the most pressing economic priority—creating jobs.

Using standard macroeconomic analysis and assuming the authorizations were fully appropriated, we estimate that $200 billion in state and local government relief would generate roughly 2.1 million jobs in 2012 and another $150 billion in grants in 2013 would generate 1.5 million jobs. Based on Okun’s rule of thumb, which relates economic output to the unemployment rate, we would expect the unemployment rate to fall 0.7 percentage points and 0.5 percentage points, respectively, in 2012 and 2013, relative to baseline projections.*

The timing and amount of funding are both sensible given the likely economic environment. According to the Center on Budget and Policy Priorities (CBPP), states are projected to face a $103 billion funding gap in their upcoming 2012 fiscal year and another $46 billion in 2013. Simultaneously, Recovery Act funds, including the August 2010 extension of the higher Federal Medical Assistance Percentages (the federal matching rates for certain state social services, notably Medicaid), will drop off to $6 billion for 2012, down from $59 billion in 2011. Because of the expiration of this federal assistance, CBPP states that “fiscal year 2012 has proven to be nearly as difficult a budget year as 2010, when state budget shortfalls reached their peak, and a more difficult budget year than 2011.” By providing up to $60 billion in grants to state governments in 2012, the Put America to Work Act could close up to roughly 60% of the projected state budget shortfalls for the upcoming fiscal year. (State fiscal years typically start in July, three months ahead of the federal fiscal year, so grant spend-out rates would determine the exact impact on state budget shortfalls over the next two budget years.)

These job creation measures are consistent with the overall budgeting approach laid out in the People’s Budget, proposed by the Congressional Progressive Caucus, which would invest heavily in direct job creation while also balancing the federal budget within a decade. Over the next decade, the People’s Budget would finance $1.45 trillion in job creation measures in addition to $213 billion worth of infrastructure investments proposed in the president’s 2012 budget request. Front-loaded job creation funding of $350 billion and $300 billion for 2012 and 2013, respectively, would more than finance the Put America to Work Act. An additional $150 billion would be leftover in each year for other economic recovery measures, such as continuing emergency unemployment benefits (scheduled to expire at the end of 2011) or making additional infrastructure investments.

As state and local government job losses continue to mount and as federal budget relief for states expires, the Put America to Work Act is an appropriate strategy for returning millions of Americans back to dignified employment.


* This calculation assumes a fiscal multiplier of 1.37 and that a 1% increase in gross domestic product generates 1.2 million nonfarm payroll jobs, which is consistent with CBO estimates of the impact of the 2009 Recovery Act as well as private sector forecasts. The impact on the unemployment rate is calculated by the difference in the GDP gap (actual GDP relative to potential GDP) with and without the additional fiscal support, divided by 2.5 (meant as a conservative estimate of Okun’s rule of thumb).

See related work on Jobs | Wages, Incomes, and Wealth

See more work by Andrew Fieldhouse