CAP TIMES: Austerity in Wisconsin killing jobs

December 21, 2011
Mike Ivey

A liberal-leaning Milwaukee think tank is out with a new report blaming state budget program cuts and public worker paycheck reductions for exacerbating Wisconsin's job struggles.

The report from the Institute for Wisconsin's Future says the reduction in take-home pay for tens of thousands of public employees is now hurting the private sector, as are the drastic state budget cuts for K-12 education.

Jack Norman, research director with the IWF, says Gov. Scott Walker's "cuts only" budget approach has directly diminished consumer spending, which accounts for roughly two-thirds of the state's economy.

Wisconsin has lost jobs over the past five months while many other states have seen an increase in job creation.

"You can't blame the national economy," says Norman in a statement. "If Wisconsin had simply matched the national rate of job creation since April, nearly 34,000 more families would have a breadwinner with a full-time job rather than losing 34,000 jobs."

In addition to cuts for public workers, Wisconsin has also turned down some $1.3 billion in federal funds, including more than $800 million to improve the state's rail system that would have created an estimated 10,500 rail line construction jobs over four years.

Walker has maintained that his policies are creating an environment where the private sector can flourish. Spending cuts were needed, the governor says, to avoid future tax increases and close a $3 billion budget hole.

But Steve Deller, an economics professor at UW-Madison, says that reducing spending during a deep recession can often make things worse, as this blog chart suggests.

"Economic modeling shows that the extreme cuts to state and local programs cost thousands of jobs and put Wisconsin in a weak position to create jobs," says Deller, who appeared at the Capitol on Tuesday with Norman and Rep. Brett Hulsey, D-Madison, to introduce the IWF report.

Taking $700 million out of Wisconsin's economy through increased public worker benefit contributions that reduced paychecks for the equivalent of 260,000 workers will lead to the loss of about 6,900 full‐time jobs in the private sector during the first year of Walker's budget, the report warns.

Those estimates on job losses are based on Implan 3 economic simulation software, widely used in government, industry and universities. The program estimates both the direct and indirect effects of changes to the economy.

Abdol Soofi, an economics professor at UW-Platteville, took a look at the report and says its basic premise is sound. He says less money in the pockets of middle class workers clearly impacts the broader economy.

"People habitually save a fraction of their current income and consume the remainder," he writes in an email. "The fraction of income saved depends on the income of the income recipients. In the United States on average the wealthy class saves roughly about 50%, the middle class saves around 25%, and the low income class saves nothing of their income."

For that reason, Soofi says that raising the amount of disposable income for the wealthy has less impact than raising incomes for the middle or lower classes.

"The Governor's reducing a dollar out of wages of the middle class and the poor, and raising the disposable income of the rich by one dollar  (by reducing their tax liabilities) will reduce the consumption of the middle and low income classes by 75 cents while the extra dollar received by the rich will increase their consumption by 50 cents. This implies a net loss of the consumption at the national level by 25 cents."

"Since consumption spending is an important component of the gross domestic product, the GDP falls and unemployment increases because of income redistribution."