The Economic Consequences of Proposed California Budget Cuts

Posted on 27 May 2010

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By Ken Jacobs
UC Berkeley Labor Research Center

When it comes to jobs and the economy, not all solutions to the state’s budget shortfall are equal. Most measures designed by well-meaning state leaders to reduce the deficit also will depress employment and economic growth in California. But the magnitude of those impacts will vary significantly – depending on what measures are enacted – and the worst effects can be avoided.

That’s why it’s so important to pay close attention to the different budget proposals being put forward. We’ll all pay a high price if we don’t.

My colleagues Laurel Lucia, Bill Lester and I have modeled the impacts of the governor’s proposed 2010-2011 budget cuts on employment and economic output in the state and found that his cuts only approach would result in the loss of 330,000 full-time-equivalent jobs, boosting the state’s already high unemployment rate by another 1.8 percentage points. The cuts also would cost California families and businesses more than $36 billion in lost economic output, along with $1.9 billion in state and local taxes. 

The projected job loss is greater than the total job growth projected by the Legislative Analyst’s Office for 2011.  This analysis was done using full-time equivalent jobs; because many of the human services jobs are part-time, the actual number of people affected would be much greater. In addition, we estimate that 270,000 adults and 123,000 dependent children would also lose job-based health insurance.

The worst of these impacts don’t have to become reality. We found that balancing cuts with $5.4 billion in targeted revenue increases from upper-income households, corporations and a new oil severance tax would save nearly 250,000 jobs – half of them in the private sector – and 18 billion in lost economic output.

The proposal from Assembly Speaker John Pérez released earlier this week, would go even further in avoiding the negative impacts on employment and providing additional stimulus to the economy. Under the Speaker’s proposal the state would essentially borrow the funds needed to balance the budget and pay it back over time through an oil severance tax.

The majority of jobs lost from the Governor’s proposal – 261,000 – would result from $5.4 billion in cuts to major health and human service programs that bring in significant federal matching funds.  This job loss is 15 times greater than the number of jobs that would be lost through an equivalent increase in revenue. Close to one-quarter of the budget savings from cuts to health and human services programs would be negated due to lost state and local tax revenue, the study concluded.

Cuts to CalWORKs, In-Home Supportive Services and health services for low-income populations hurt the economy more than the equivalent amount of revenue increases. That’s because these cuts would result in the loss of $6.8 billion in federal matching funds and take dollars out of the pockets of low-income residents, who are most likely to put them back into the economy immediately. 

The effects of cuts in health and social service programs would, of course, go well beyond the impact on jobs and health insurance coverage. Cuts to CalWORKs and child care programs would create barriers for parents to stay in the workforce. Cuts to IHSS are likely to result in a higher number of elderly and disabled residents placed into nursing homes. Cuts to health programs will result in delays in needed care.
Robert Reich, a UC Berkeley professor of public policy and former U.S. labor secretary, responded to our report this way:

It makes as much sense to cut social service programs in an economic downturn as to drill holes in a boat during a flood. As this important analysis makes clear, the governor’s proposed cuts would not only hurt the state’s most vulnerable people at a time when they most need help, the cuts would also harm the economy, hurting all Californians. In order to reduce the debt, it would be far wiser to raise taxes on corporations and the wealthy.

There is another alternative. In fact, as we have seen from the proposals coming out of the Assembly and the Senate this week, there are many. The State has to make a choice.

The report, “The Economic Consequences of Proposed California Budget Cuts,” is online at


Ken Jacobs is the Chair of the Labor Center, where he as been a Labor Specialist since 2002. His areas of specialization include: health care coverage, low-wage work, the retail industry and public policy. Recent papers have examined declining job-based health coverage in California and the U.S., the public cost of low-wage jobs, and transformations in the retail industry.

Every job that is paid for by the state comes directly from the state tax revenues. Oh sure, these people pay taxes as well - but they pay a relatively small proportion of the amount of taxes that they consume, and certainly can NEVER pay as much as they cost in terms of taxation.

Private jobs, on the other hand, are generally net pluses for the tax base. These people generally are (and at least have a CHANCE of) paying more into the tax base then they are taking from it.

And herein lies the fallacy of the pro-government argument. Don't get me wrong, some jobs that do nothing but support others are vitally necessary. Take public health workers.

Up to a point, hiring public health workers is good for the economy. They allow us to avoid loss of productivity and the tax base that goes with that productivity. After a certain point, however, we get to the law of diminishing returns - even for them. You don't need five full-time equivalent state workers to be there at your ear 24/7 to tell you that you shouldn't be smoking or that you should eat less trans-fats. Either you already know it and don't care, or you're uneducable. These people aren't doing anything - not even decreasing risk of loss - except being annoying.

Same thing for cops and firefighters. They are, to a point, absolutely necessary to our society. But we don't need to each have our own INDIVIDUAL police officer or fireman. That's not just wasteful, it's unsustainable.

And that, in a nutshell, is the problem we've gotten in to. The current budget is simply unsustainable since we have driven so much of the tax base out of California.

We have an unfunded HALF TRILLION DOLLAR liability to our three biggest public employee unions alone.

We have spent far more than we have. We need to make cutbacks, and the only reasonable place to make them is in state employees.

Main Entry: unsustainable
Part of Speech: adj
Definition: not able to be maintained or supported in the future, esp. without causing damage or depletion of a resource's 21st Century Lexicon
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The money isn't there. Did you notice, perhaps, that the House of Representatives just bailed on giving the states money ($24 billion)to support medicaid? And for COBRA extension?

Even the extension of jobless benefits is iffy, and if it happens at all, it will be the last one until after the election.

Economists say our current spending - both at the national and at the state levels - is unsustainable. They do not say that we need more taxes to pay for it - they say it is unsustainable.

We should have trimmed this back gradually years ago, to permit people to be weaned off if it, but we didn't do that. Instead we borrowed money we didn't have - promising to pay it off in the future (as in today) for the money that was spent a decade ago. We don't have the money to do that.

Even if we passed a tax today - even if we could beat that dead horse just one more time and get the tax money and not just drive more of our tax base from the state - it would take us six months to get the first 40% of that tax. We'll be broke before then.

We have to make the cuts now that we should have started a decade ago. All of them.

In this time of economic crisis, the state should support its people by organizing programs that will give jobs. Yes the state's debt will be reduce if they cut off the budget because that would mean they can save on health care and social insurance but in the long-term the high unemployment rate will hurt not just the economy but its people. unleash the power within review