California can’t afford to repeat the Great Recession: State spending is critical to economic recovery – UC Berkeley Labor Center

We cannot afford to repeat the mistakes of the Great Recession

California entered the pandemic in better fiscal shape than before the Great Recession; in 2019 the state had sufficient reserves to weather a mild recession. In January 2020, in anticipation of continual revenue and economic growth, Governor Newsom proposed a $153 billion budget that increased both one-time and ongoing spending on education, housing, and health care, new programs to combat homelessness, and desperately-needed education funding. Then the pandemic hit.

When the impacts of the pandemic began to hit in spring 2020, the Governor’s May Revision became a “workload budget”: it froze most spending at 2019-20 levels, with few exceptions for COVID-related spending. The state ultimately adopted an austerity budget with only $133 billion in general fund spending. The budget made severe cuts to both K-12 and higher education, deferred an  important expansion of Medi-Cal, and eliminated proposed spending on housing and infrastructure.

It now turns out that the 2020-21 revenue projections were overly pessimistic. The adopted budget projected that revenues would drop by nearly $15 billion from 2019-20. Instead, revenues are on track to exceed 2019-20 revenues, nearly matching the projected revenues in the Governor’s January 2020 proposal. The legislature has already restored some of the cuts made in 2020-21 effective July 2021, but these don’t address the scale of revenue loss and cost increases.

In December 2020, California officials estimated that this “windfall” could amount to $26 billion, driven by the wealth increases and stable employment of higher-income Californians. But despite the projected surplus for 2021-22, the budget forecasts deficits for the coming three years, through the 2024-25 fiscal year. The Governor also projects that state job losses will not return for half a decade; the Congressional Budget Office (CBO) projects the U.S. economy will not recover 2020 job losses until 2024. The Great Recession had its most severe fiscal impacts in the few years after it began. We need to be planning ahead to prevent long-term damage to our economy and to California families.

It’s important to emphasize that California is not enjoying a “windfall;” we are on track to match non-pandemic revenues for 2020-21, and projected to lose revenues after that. This is not the time to be complacent about the inadequacy of our revenue base for sustaining long-term recovery. 

California was one of the most severely impacted states during the Great Recession. Credit ratings agencies flagged California cities as high risk for municipal bankruptcy. Like most states, California saw record job losses in the public sector, deteriorating levels of public infrastructure and services, and years of compromising on California’s commitment to an equitable economy. As we wrote in October, the state’s economy had barely recovered by 2019, and by many measures (job quality and public sector employment) the economy was more vulnerable in 2019 than in 2007.

Studies of the impacts of the Great Recession confirmed the importance of avoiding austerity measures to prevent long-term economic damage. Research from the Great Recession demonstrated that short-term labor markets have a stronger impact on long-term outcomes  than previously understood. An analysis of job recovery in 50 states from 2008-2013 found that states that cut their public-sector workforce had deeper job losses overall and in the private sector. EPI found in 2009 that for each dollar of budget cuts, more than 50% of the jobs and economic activity lost will be in the private sector. 

In 2010, the Labor Center found that cuts of 261,000 jobs in health and human services would result in $21 billion in lost economic output, and $1.3 billion in state and local tax revenue. Close to 25% of the savings from those job cuts would be negated due to loss in economic activity.

In 2018 dollars, the loss of 100,000 state and local jobs matching the distribution of actual job losses from 2008-2013 have an economic multiplier effect of 1.51: that is, for every state or local job loss and additional .51 jobs are lost in the rest of the economy. This represents $10.4 billion in direct income loss, and more than $3 million in income loss induced by reduced consumer spending. 

California has already seen significant public job loss

From February to December 2020, California lost more than 200,000 state and local government jobs, including nearly 170,000 local government jobs. The early fall recovery has clearly slowed; in December we had a net loss of private sector jobs—in both the U.S. and California—for the first time since April (Figure 2).

These losses come on the heels of years of declines in state and local employment. When compared to population growth, state and local employment was well below pre-Great Recession levels heading into 2020 (Figure 3). Since February, after a short lag in job loss, the share of California’s jobs in state and local government has continued the downward trend that began in 2008.

This gap represents lost teaching staff, school support staff, child protective services workers, preschool teachers, parolee counselors, public hospital nurses, transit operators, and many other jobs that form the foundation of economic mobility for Californians. Two areas of underinvestment have been starkly exposed over the past year: education and health care.

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