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Commentary By Steven Malanga

How Productive Is Our Government?

Private sector productivity has soared in the past year, helping to shape the country’s rise out of recession. Businesses have pared down their workforces, cut back on nonessential spending, and pushed their workers to do more.

Have governments around the country increased their productivity, too, giving taxpayers more for their money? We have little idea, because we put a low priority on measuring public sector costs and output. As a result, we’re not in much of a position to say whether our tens of thousands of federal, state and local government units and departments can squeeze more out their workforce without compromising services. And we don’t really know how much of the $275 billion in 2009 stimulus money that Congress allocated to bolster state and local employment was necessary, and how much merely kept already-bloated bureaucracies and ineffective programs expanding.

Instead, as states like California consider steep cuts in programs and services, we can only guess whether such moves are necessary, or whether they simply constitute threats by politicians looking to create momentum for more federal bailout money, or for more local tax increases, or for both.

Although it’s true that measuring government output is not simple, the most superficial of measurements suggest much of government has been anything but productive, especially if you focus on our state and local workforce, which is 10 times larger than the federal government’s. Both state and local government employment, for instance, kept growing through much of the steep recession we just exited, and only stopped increasing somewhere in the middle of 2009. That’s one reason why the unemployment rate among government workers is now only about one-third as high as for private sector workers.

Of course, unlike a private business, governments have to keep delivering services in a recession and can’t go out of business. So maybe we shouldn’t expect the public sector to shrink much just because tax revenues fall. The problem, however, is that in such a counter-cyclical model we’d also expect that government wouldn’t expand robustly in times of budget surpluses. But that’s often what government has done here, with the result that we see vigorous growth over long periods of time encompassing both recession and expansion.

In the last 20 years, for instance, the state and local workforce has grown by 4.5 million workers. At the heart of that gain has been a whopping 36 percent increase in public education hiring, and a more than two-thirds increase in spending after adjusting for inflation. During that period, student enrollment in public schools has increased just 20 percent. The large spending gain relative to a modest enrollment increase helps explain why the United States today leads by a wide margin virtually all industrialized countries in per pupil public education spending (+50 percent, on average), according to the Organization for Economic Co-Operation and Development.

You can see these numbers at work in some of our states with the biggest budget messes. Consider New Jersey, for instance. The state and many of its municipalities have been in a nearly constant state of budget crisis since late 2001, with virtually no relief even during the bubble years of 2005-2006. Yet despite modest growth in school enrollment of less than three percent since 2001, Jersey’s public education establishment has increased hiring by 14 percent, adding 28,000 new employees to serve an additional 36,000 pupils.

Neighboring New York has hired even more aggressively. Local administrators have added some 14,746 teachers and 8,655 nonteaching professionals, such as administrators, guidance counselors, nurses, psychologists and social workers since 2001, even though enrollment in that state has actually shrunk by 121,280 students over that period.

The impact of the big employment gains have been amplified by growing salaries and especially by sharply higher benefit costs. The bill for pension and health benefits in Jersey public schools has grown by 125 percent during this decade. Since the state’s population has been virtually flat during that time, that steep additional spending has sharply raised costs per taxpayer.

Judging whether this money has been productive isn’t as easy as counting widgets. Still, if performance on the National Assessment of Education Progress tests, known as the nation’s report card, is any indication, the return on investment has been negligible. Our high school seniors are scoring lower today on NAEP reading tests than they did in 1990, while our eighth grade scores are just one percent higher.

Of course, scores alone don’t reflect the full measure of achievement, and we don’t have any tests to measure lots of other government work. That’s why some countries have gone to some effort to chart government productivity more accurately. The Office for National Statistics in the U.K., for instance, has been working for a decade to measure and refine government costs and outputs in a range of areas, from public education to the national health service. In November, the ONS issued a report which estimated that public service productivity fell by 3.4 percent from 1997 to 2007, led by sharp increases in costs, which rose 13 percent faster than in the private sector, mostly because of higher public wages.

Such conclusions can be uncomfortable, especially for the political party in power. So efforts at measuring government costs and output can be short-lived. The U.S. began a series of studies in the early 1980s, including studies that focused separately on the federal workforce and on state and local government. But the work eventually disappeared in the mid-1990s, a victim of budget cuts.

On the bright side, at least that shows that not every government program keeps going forever.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets