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Job Creation: The Engine in Chief

Whatever Happens to the Obama Jobs Bill, the Federal Government’s Broad, Deep Reach Into Private-Sector Employment Won’t Change

Courtesy Lockheed Martin Corp.
Federal spending supports not just direct employees, but also contractors such as those that built the F-22 Raptors.

In February, House Speaker John Boehner articulated what has become an axiom of current Republican economic theory — that shrinking the federal government is the path toward more rapid U.S. economic growth and increased private employment.

Boehner was blunt in his assessment that the federal workforce is too large and that GOP efforts to curtail spending were intended to reverse what he saw as a troubling trend. “Over the last two years, since President Obama has taken office, the federal government has added 200,000 new federal jobs,” he asserted. “If some of those jobs are lost in this, so be it.”

From the other end of the political spectrum comes the notion that the economy is so weak that the government ought to be the employer of last resort, offering jobs to those who cannot find them in the private sector.

That sentiment explains the effort begun in early September by Democratic Sen. Frank Lautenberg of New Jersey to create a “21st Century Works Progress Administration,” modeled after the New Deal agency of the same name. The new WPA would be lodged in the Labor Department and authorized to spend $250 billion to hire unemployed people to do things that a pantheon of federal agencies think need to be done.

The truth is that both sides may be thinking about the issue of government employment the wrong way. The federal government — not only through the myriad programs it operates, but also because of the vast array of contracts it awards, grants it makes, loans it guarantees and mandates it imposes — is already by far the largest employer in the nation, in effect if not entirely in fact. And the real federal workforce is many times larger than people ordinarily assume.

When the Pentagon decides to buy a new class of destroyer, that brings shipyards to life. When the Department of Homeland Security decides to change its standards for airport screenings, that means sustained employment for the people who make luggage scanners. When the Department of Transportation doles out grants for highway bridge rehabilitation, contractors across the country find themselves newly employed. When Medicare decides to pay for a new class of drug treatment, the pharmaceutical maker that invented it gears up the production line. The list of such actions is almost endless in the $3 trillion-plus enterprise headquartered on the Potomac.

That bit of reality is reinforced by the research of Paul C. Light, a professor of public service at New York University. “The true size of government reached 14.6 million employees in 2005, including 1.9 million civil servants, 770,000 postal workers, 1.44 million military personnel, 7.6 million contractors and 2.9 million grantees,” Light wrote in his most recent analysis of the subject.

Washington is often the employer of first resort, not the last. And both political parties can take responsibility for this circumstance. Moreover, it’s hard to imagine how shrinking the government — at least in the short run — might have any effect other than to reduce overall employment in the United States.

That’s because at least one dollar out of every three spent by the government essentially is used to put someone directly to work. And that calculation doesn’t take into account those Americans who make their livelihoods by providing services to the people supported by government largess. Hundreds of billions of dollars are paid each year to Social Security recipients and to physicians and hospitals on behalf of Medicare beneficiaries. Although that money doesn’t create jobs directly, it certainly keeps large numbers of Americans working.

Light has studied the federal workforce, its size and its effectiveness for years, both at NYU and at the Brookings Institution. He wrote in 2006 that a trend toward a smaller federal workforce that began with the end of the 1991 Persian Gulf War had reached bottom in 1999 — at about 11 million, including contract and grant employees. Since then, the trend has only been up.

It’s hard to imagine — absent a major shift away from federal involvement in all aspects of the nation’s economy — that this trend will change.

Medical care alone, which is the largest driver of increased federal spending, is also a major reason for growth of what might be called the indirect federal workforce. And while the Defense Department is facing potentially billions of dollars in budget cuts over the next decade, it remains the largest single source of federal contracts. Whole companies — some of the largest industrial producers in the country — owe their very existence and their employees owe their jobs to government contracts.

To change any of that in a significant way, especially overnight, would be to upend the U.S. economy in ways that neither political party would particularly favor. Which is why there’s nothing on the roster of possible proposals from the congressional “super committee” — the dozen lawmakers charged with devising a plan before Thanksgiving to reduce projected deficits by $1.2 trillion or more in the next decade — that would fundamentally alter the federal government’s standing as an indispensable engine of private sector employment. And Washington will retain that central roll no matter whether the president’s package of spending and tax incentives designed to spur job creation (and push the unemployment rate below 9 percent for the long term) wins the embrace of Congress this fall, gets enacted only in part or is spurned altogether.

How Big Is the Workforce, Really?

Labor Department statistics show that the federal government currently has about 2.2 million civilian employees, not counting the 621,000 who work for the Postal Service, or the 1.6 million active-duty members of the armed services. While those figures are close to what they were when Light did his study six years ago, it’s likely that the number of people who carry out work for the government under contracts or grants has grown.

The plain evidence is that the amount of money spent by Washington — particularly under continued war-related activities and the economic stimulus enacted in the wake of the 2007-09 recession — has increased considerably over that time.

Federal contracts, most of which result directly in the provision of goods and services to the government, amounted to $538 billion in fiscal 2010 — a 37 percent increase over 2005. Federal grants — many of which are tied to specific work for the government — grew by 30 percent over that five-year period, to $573 billion.

Obama has called for departments and agencies to account for the number of contract workers they employ and to make sure that contractors aren’t assigned tasks that ought to be performed by workers actually on the federal payroll. But it seems unlikely that those calls for change have resulted in significant adjustments.

“It is unclear whether the number of federal contractors has increased, decreased, or stayed the same since 2005,” said a Congressional Research Service report from April of this year. The CRS paper noted that the Obama administration had planned to reduce the cost of federal contracts and that an omnibus appropriations bill enacted in March 2009 called for a report to Congress on the aggregate federal workforce, including an accounting of contract workers. But, the CRS said, “it is unclear whether the required report to Congress has been completed.”

It would definitely be a reversal of the pattern of the past decade, if there were fewer contractors today.

“With the vast expansion in the contract-generated workforce, which reflected a nearly $50 billion increase in contract spending between 2004 and 2005 alone, there were five and a half contractors and grantees for every federal civil servant, up from just three and a half at the end of the Cold War,” Light wrote.

All it takes is a cursory review of the annual reports of companies whose shares are publicly traded to find ample evidence that the federal government keeps a host of enterprises humming. Take Lockheed Martin Corp., whose 132,000 employees build fighter jets for the Air Force, gunnery training systems for the Army, cutters for the Coast Guard and satellites for NASA. The company reports that last year 84 percent of its $46 billion in revenue came from the government. Or consider Northrop Grumman Corp., whose 117,000 workers make it a defense contractor almost as large as Lockheed. About 92 percent of Northrop’s $35 billion in revenue last year came from the federal government.

It isn’t just the makers of military hardware who benefit from the government’s demand for goods and services — although the Pentagon supplies more than two-thirds of federal government contracting dollars, amounting to $367 billion in fiscal 2010, according to Office of Management and Budget figures.

In early September, the scientific and engineering company SAIC Inc. won a $15 million contact to upgrade data management facilities of the Department of Health and Human Services. Last year, SAIC and its 43,000 workers relied on Washington for 89 percent of its $11 billion in revenue.

And Humana Inc., a large health insurance company with 35,000 workers that operates in large part through the Medicare Advantage program, earned 78 percent of its $34 billion in revenue last year from the federal government.

Humana is far from the only health care company that thrives under federal auspices. HHS doled out $367 billion in grants in fiscal 2010, according to OMB — almost two-thirds of the $573 billion in grants made that year by federal departments and agencies.

By far the biggest share of those grants, roughly $254 billion, went to states as the federal match for the Medicaid program. That money was then paid to thousands of health care providers, whose jobs depend on a steady flow of Medicaid patients, whose bills are paid by federal and state taxpayers.

Will It Ever Change?

One way to look at the effect of the federal government on U.S. employment, and to extrapolate where this trend is heading, is to merely reflect on the size of yearly economic activity attributable to policy decisions in Washington.

Total gross domestic product in fiscal 2010 amounted to $14.5 trillion. Total federal outlays that year amounted to almost $3.5 trillion, or roughly a quarter of total GDP. With that much money flowing through the government’s hands, it’s no wonder that a sizeable share of the nation’s workforce is directly or indirectly in the government’s employ.

If Light’s 2005 estimate of a “true” federal workforce of just under 15 million remains close to the total today, that would mean more than one of every nine payroll positions in the United States is underwritten by federal taxpayers.

In fact, the jobs figure might be even larger but for the fact that about a third of the government’s spending is in the form of “transfer payments” to individuals — Social Security and welfare benefits, for example — that don’t go straight to employers, and as a result don’t contribute to Light’s estimate of the federal workforce.

Several conditions argue against much change in this picture, other than at the margins.

First, the government actively promotes itself as an engine of private job growth by its reliance on contractors for so much in the way of goods and services — even though analysts such as Light consider that nothing more than a means to disguise the government’s true size.

The website of the Small Business Administration is instructive. The agency, which is charged with promoting the development of smaller enterprises, suggests that companies look to Washington for work opportunities, noting that the federal government is the world’s largest single consumer.

“Selling to the federal government can provide significant revenues for your business — and the process is not as complicated as you may think,” the SBA website says.

Second, national defense, by its very nature, is contractor-dependent. As Light put it: “The federal government often uses contractors and grantees to provide talent it cannot recruit, specialized services it cannot produce, competition it cannot generate among its own organizations, and equipment that it cannot and should not build itself.”

The point is seen clearly in the changes in the size of the federal workforce after the Cold War and in the military buildup that followed the Sept. 11 terrorist attacks. Light attributes most of his measured decline in federal workers of all types in the 1990s to the peace dividend after the Cold War.

And he said all of the increase in contractor employment between 2002 and 2005 — almost 2.5 million workers were added in that three-year span — was the result of increased defense spending.

There are concerns about the federal workforce that go beyond its size. One trend is to push work onto state and local governments. Medicaid may be the premier example of a program ostensibly run by the states, yet dependent on the federal government for resources and beholden to it for its operating rules. But the education overhaul law known as No Child Left Behind that was enacted under President George W. Bush likewise imposes a significant responsibility on state and local governments.

Some critics of government contracting contend that in many cases it results in a false economy. A study by the Project on Government Oversight, released in September, found that civilian federal workers cost less than contractor billing in 33 of 35 occupational classifications that were analyzed, but that in all 35 the compensation for contract workers was actually less.

Light and others have asked not only whether the government is too big, but also whether it is big enough to meet the demands for service imposed on it. Regardless of the yin and yang of that question — which seems to be mostly a political matter rather than an academic one — it seems all but certain that the numbers will continue growing, in spite of the protests of politicians. It just may be that the numbers on the government’s actual payroll will never tell the whole story.

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