Recent reports from the Labor Department indicate that September saw the addition of 103,000 jobs. Given the current sluggish state of the economy, this figure could have been significantly lower. However, a deeper examination reveals that this seemingly positive headline number may not be quite as encouraging as it appears.
A notable factor in the jobs report was the return of 45,000 communication workers who had been on strike. When we exclude this group, the net job increase drops to a mere 58,000. Furthermore, even the official count of 103,000 jobs was insufficient to reduce the unemployment rate, which remains at 9.1 percent. Additionally, the September labor report contained several other disappointing statistics that warrant attention.
For instance, the average duration of unemployment reached a record high of 40.5 weeks. Almost 45 percent of the 14 million unemployed individuals have been jobless for over six months, a rise from 42.9 percent in August. More concerning is that when we factor in those who have given up on job hunting and individuals working part-time yet desiring full-time roles, the unemployment rate swells to an alarming 16.5 percent.
Even the most optimistic observers must admit that the job market appears to be barely functioning. Even though Gross Domestic Product (GDP) figures do not indicate a formal decline, the growth we are experiencing falls short of alleviating the soaring debt burden. While people are aware of the implications at the federal level, the looming crisis is shifting to state and local governments.
States and municipalities have significantly overcommitted to pension programs for their employees. As tax revenues decline, it is becoming glaringly clear that either pension payouts or essential services—and likely both—will need to be scaled back. Let’s take a closer look at California, which serves as an instructive case study.
California’s Financial Sickness
California is well-known for its eccentricities, often referred to as the ‘land of fruits and nuts.’ Unfortunately, its financial woes mirror those of many other states, but in California, these issues are both magnified and absurd. The state grapples with a significant budget shortfall, compounded by a lack of political resolve to address it.
One of the leading financial journalists today, Michael Lewis, highlighted California’s fiscal issues in a recent article for Vanity Fair titled, California and Bust. He scrutinizes the inefficiencies stemming from the state’s overcompensated public workforce.
During his investigation, Lewis spent time in California, exploring the state’s desire for abundant services without the willingness to pay for them. This inquiry culminated in a bike ride along Santa Monica with former Governor Arnold Schwarzenegger and his economic adviser, David Crane.
Crane noted, “This year the state will directly spend $32 billion on employee pay and benefits, a 65 percent increase over the past decade. In contrast, funding for higher education has seen a 5 percent decline, health and human services have only increased by 5 percent, and spending on parks and recreation has stagnated—all largely due to skyrocketing employment costs.”
But this is merely the tip of the iceberg.
A Telling Sign of Things to Come
Lewis discovered that the situation at the city level is even more dire. The city of Vallejo serves as a stark warning for the future.
When Vallejo declared bankruptcy in 2008, 80 percent of its budget was allocated to salaries and benefits for public safety employees. By August 2011, as part of its bankruptcy resolution, “Vallejo’s creditors received just 5 cents on the dollar, while public employees received between 20 and 30 cents on the dollar.” Today, Vallejo operates with barely half the number of firefighters it had three years ago. “Abandoned businesses are overtaken by weeds, and all traffic lights blink continuously, a mere formality since there are no officers left to patrol the streets.”
This alarming scenario is not unique and will likely be seen across the nation. The housing boom, inflated by artificially low interest rates set by the Federal Reserve, distorted public financing. As housing values soared, property taxes flooded local budgets like fierce river waters.
Unfortunately, local leaders misinterpreted this one-time revenue spike as a stable trend, leading them to base future budgets, pension agreements, and capital projects on this flawed expectation. The stark reality now is that these financial commitments cannot be fulfilled in the current economic climate.
In retrospect, the delusion is clear. With the financial safety net yanked away, the decisions made during the housing boom stand exposed as unrealistic. Cities and their residents are left to grapple with the consequences.
Promises will be reneged, essential services will be cut back, and in some cases, refuse will accumulate on streets, serving as a grim reminder of the illusory prosperity that once existed.
Sincerely,
MN Gordon
for Economic Prism
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