Stress-Testing States

One of the few great inescapable facts in the field of economics is the reality of the business cycle. No matter how high-flying an economy might appear, another recession is coming sooner or later. It can be difficult, if not impossible, to regularly predict when one might occur, or how severe it may be, but recessions and their place in the business cycle are an accepted fact of economic life. Therefore, preparing for recessions is an equally inescapable concept. 

It has been more than eight years since the end of the last recession, the third longest period of expansion in U.S. history, and many are rightfully beginning to look ahead to the next economic downturn. However, one of the most effective ways to look forward is to look back and make sure that we have adequately learned the lessons of the Great Recession. Nowhere is this type of postmortem more appropriate than for state and local governments.

In the five fiscal years immediately following the start of the Great Recession, state and local governments shed almost 750,000 workers. Though this undoubtedly cut waste and increased efficiency in many governments across the country, it also was a painful and disruptive change to many parts of the economy. The loss of so many mid-wage jobs over so short a time is a big reason that the Great Recession was followed by the not-so-great recovery. Research shows that extraordinary fiscal actions can harm regional and national economic recoveries, differentiating performance relative to that of neighbors.

To be fair, state and local governments typically lag the economy coming out of a recession, so it is no wonder that their payrolls should have shrunk significantly following the largest economic downturn in more than a generation. However, something was different about the way the Great Recession impacted states in particular, but also their local government counterparts.

During the immediate five years of the recovery, state and local government employment lagged the rest of the economy by a larger margin than ever before. Almost a decade later, state and local government payrolls have still not recovered to pre-recession levels, plateauing around 300,000 jobs below the previous peak. On a per-capita basis, there are actually fewer state and local government employees today than at any time since the late 1980s.

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