"But it just ain’t so. Pundits who
lament the declines in government employment fall for one of the classic
blunders in economics: looking only at the short-run effects of a policy
on some people, but ignoring the long-term effects on everybody else.
(Henry Hazlitt’s classic,
Economics in One Lesson, exposes this blunder.) To understand the
confusion, we must dissect what exactly people mean by the term “economic
recovery.” A proper understanding of economics reveals that government
cuts -- not increases -- are what’s needed for renewed economic
vitality."
It Just Ain't So
Government Spending Cuts Are Bad
for the Economy?
Take a closer look.
Tyler Watts
Posted August 15, 2012
“Looks like I picked the wrong week to quit amphetamines,” laments the
gruff air traffic controller played by Lloyd Bridges in the ribald
disaster-spoof Airplane! Facing the tense situation of helping a
nerve-wracked pilot safely land a large passenger jet, “Steve McCroskey”
could get a performance boost by popping some pep pills, right?
In like manner, many commentators have suggested recently that the U.S.
economy could use an upper in the form of more government spending --
specifically, more public-sector jobs. Governments at all levels, they
might say, picked the wrong time to engage in mass layoffs. The sentiment
is expressed in recent articles in the
New York
Times
and
Wall Street Journal. The Times reporters claim that the
recent loss of 706,000 public-sector jobs -- mostly at state and local
governments -- is “hurting [economic] recovery.” The article claims the
unemployment rate would be a full point lower if government employment
were at its 2009 levels and that public-sector “layoffs will siphon $15
billion in spending power [from the economy].”
The Journal reporters make similar claims about federal government
employment. Their sources warn that (alleged) coming federal spending
cuts “would tip the U.S. into recession early next year.” They note that
federal spending is declining at 0.4 percent annually, with the federal
government having shed 52,000 jobs in past year. These cuts have a ripple
effect on employment and income, they argue, due to less federal
“stimulus” money for state and local governments to maintain spending and
employment, less money flowing to government contractors, leading to less
employment in these local industries, and so on.
Somewhere the ghost of John Maynard Keynes is smiling his consent; if
only the U.S. economy could continue to tap the stimulant of government
jobs, the recovery would be much stronger!
But it just ain’t so. Pundits who lament the declines in government
employment fall for one of the classic blunders in economics: looking
only at the short-run effects of a policy on some people, but ignoring
the long-term effects on everybody else. (Henry Hazlitt’s classic,
Economics in One Lesson, exposes this blunder.) To understand the
confusion, we must dissect what exactly people mean by the term “economic
recovery.” A proper understanding of economics reveals that government
cuts -- not increases -- are what’s needed for renewed economic
vitality.
What Does “Economic Recovery” Really
Mean?
Most economic commentators focus on simple
numerical indicators such as GDP growth and the unemployment rate. In the
heady pre-recession years U.S. real GDP growth hovered around 3 percent
and the unemployment rate bottomed at about 4.5 percent. The latest GDP
growth figure stands at 1.5 percent, and unemployment is 8.3 percent --
poor indeed in comparison with those rosy benchmarks. Government cutbacks
are bad news for those who only think in these terms. Government
purchaseslike hiring more workersadd directly to GDP, and if extra
government hiring drew at all from the ranks of the unemployed, it
would also reduce the measured unemployment rate.
But so what? If the goal were really just to get GDP up and unemployment
down, it would be a simple task: Government would merely hire all
unemployed people at whatever price it takes to induce them to
“work”; the higher the pay the better, because -- remember -- increased
government purchases add directly to GDP!
Those with a shred of common sense have probably anticipated two obvious
objections to this procedure: What exactly will these government workers
do? And where is the government getting the money to pay them?
This is where the macro indicators start to lose their meaning. What
really matters for economic health is not simply the percentage of people
drawing a paycheck, nor the alleged dollar value of total “production.”
What matters is this: Are people doing the best they possibly can with
their limited time, talents, and resources to serve the limitless wants
of their fellow human beings? If not, how do things need to
change?
Market-Based vs. Political Employment
Perhaps we’ve been spoiled by hundreds of years
of a generally prosperous and growing market economy into assuming that
all workers necessarily add to economic output by exactly the value of
their paychecks. There is a strong tendency toward this result in a
strictly market-based competitive economy. Companies whose revenues don’t
cover costs can’t afford to keep their land, capital, and labor employed
very long. Workers who produce more value than their paychecks are likely
to see their pay bid up or start their own enterprises.
But such is not the case with government workers. Sure, some of them
provide valuable services like filling potholes and judging court cases.
But politics plays by a different set of rules than competitive markets.
Political spending doesn’t have to pass a market test, wherein the price
paid by willing consumers must cover the costs of the land, capital, and
labor required to produce the goods. Politicians pay for their
spendingand their workersthrough taxes or, should further taxation
prove unpopular, through borrowing and potentially even printing money.
Politicians therefore face much less feedback and much less restraint
regarding the employment of unproductive workers. This leads to a common
theme in government at all levels: hiring too many workers relative to
“consumer” (taxpayer) demands, or more commonly, overpaying their
workforces relative to competitive labor market conditions. The latter
situation is common for local and state-level governments, which lack an
unlimited ability to use deficit finance, but can make large promises of
future pension benefits to tomorrow’s retirees.
For real recovery to take hold, the fact remains that workers need to be
doing something productive and not get overpaid for it. Compared to
competitive markets, politically based employment offers feeble
mechanisms to ensure government workers are really adding value by their
toil. Indeed, one lure of government employment has long been the
prospect of guaranteed lifetime income without the stress of market
pressures like competition and the need to post profits.
Genuine Recovery: Painful Changes, Spontaneous
Growth
The harsh reality of the recession has been a
stark demonstration for many enterprises that they are no longer creating
value. There are various reasons for this, mostly based on false signals
to entrepreneurs and workers generated by myriad government
interventions. Yet markets are amazingly resilient, especially in the
large, entrepreneurial U.S. economy -- despite all the intervention.
Unraveling the mistakes of the housing-boom era takes time, but the
correction grinds on despite many government attempts to forestall
painful changes. One of these changes, the need for which is fairly
evident, is a reduction in bloated public-sector workforces. Yes, this
entails some lame GDP and employment numbers, especially in comparison to
the peak years of the boom. These numbers are largely artifacts of the
cycle; the heart rate is liable to decline during drug withdrawal, but
this does not indicate that another bender is in order. Extra government
expense at this time would be a bane, not a boon, to our economic health.
In sum, “recovery through government spending” is akin to “good health
through drug abuse.” In either case, a spike in selected short-run
indicators will turn into a health disaster if the policy continues for
very long.
http://www.thefreemanonline.org/columns/it-just-aint-so/government-spending-cuts-are-bad-for-the-economy/
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