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Budget squeeze in states will force more job cuts

The private economy was - slowly - creating more jobs last month. But the government was cutting them faster.

As a major budget squeeze forces state and local governments to make ends meet, those government job cuts are going to continue.

Friday's monthly jobs report showed again that the U.S. economy is growing. But job creation is woefully slow and not helping the nearly 15 million Americans sidelined by the worst recession since the 1930s. Private businesses added 64,000 jobs. That's not even enough to keep up with the roughly 100,000 people who typically enter the work force every month.

While private businesses were hiring, public agencies were firing. Some 159,000 jobs were cut by federal state and local governments. As expected, the biggest losses - about half - came from temporary Census jobs. Local governments shed 76,000 jobs from their payrolls. Of those, roughly 50,000 jobs were cut from local schools.

Watch for more cuts in public payrolls in the months - and years - ahead. High unemployment has slashed deeply into state tax revenues, forcing deep cuts in 2011 budgets. So far, some 46 states have cut spending by $125 billion - or about 19 percent of their budgets overall, according to the Center on Budget and Policy Priorities. Looking ahead, 39 states are projecting budget gaps of $112 billion for the following year; when all states have weighed in, that's expected to hit $140 billion. Through 2011, the CBPP figures that states will have cut $435 billion in spending since the recession began in December 2007.

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State and local jobs cuts would have been much deeper without the federal aid they got from the economic stimulus package. But that money will be gone by next year. With the midterm elections just weeks away, the latest jobs data will raise the volume on the debate about what the federal government should do next to boost economic growth and create jobs faster.

Congress was in no mood to borrow more money to pay for another round of stimulus - and the election likely won't change that. It's not even clear that another stimulus package would provide anything more than short-term relief for cash-strapped states.

"It was never intended to be a source of long-term growth," said Mark Zandi, chief economist at Moody's Analytics. "It was supposed to end the recession and it met its objectives. Now the onus is on the Federal Reserve. We can't do more fiscal stimulus. "

But having cut short-term interest rates to zero, Fed officials are in uncharted territory with a limited set of untested tools. One of the few that's left is a policy of trying to push more money into the system by buying up more public and private bonds - a policy known as "quantitative easing." The Fed has already tried it once - shortly after the Panic of 2008 all but shut down the credit markets.

That move may have prevented further damage to the financial system. But it's far from clear that another round would spur banks to lend more or get businesses hiring again. If the job market doesn't improve soon, watch for renewed debate about the government using spending - or fiscal policy - to get the economy moving again.

"There's relatively little monetary policy can do," said economist and former Fed governor Laurence Meyer. "If we don't get fiscal stimulus accommodated by monetary policy - the most powerful thing the government could collectively do - then we're in trouble."

When Congress returns in November, it will have to take up yet another contentious policy debate: What to do about the broad tax cuts enacted during the Bush administration that are set to expire at the end of the year. Some business leaders say uncertainty over tax policy is a big reason they're reluctant to hire. The Obama administration recently proposed tax cuts for some forms of business investment, but Congress delayed action until after the election. That's left business leaders on hold.

"It's business investment that needs to be stimulated as opposed to further easing or stimulus by the government," said FedEx CEO Fred Smith. "It's business investment that has to pick up to create additional jobs and the economic activity. It's just that simple."