Tuesday, May 8, 2012

Austerity in America

Lots of talk about the austerity in Europe and how it doesn't seem to be working well.  But less well publicized is that we have essentially switched to austerity here in the US as many of the 50 states have had to turn to pretty drastic cuts just as the federal fiscal stimulus fades out.  What does it mean, well the Wall Street Journal decided to see what the unemployment rate would be without all the cuts to government jobs and they find that it would be 7.1%.  But this does not take into account all of the general equilibrium effects.  As they state:
If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%. Ceteris is rarely paribus, of course: If there were more government jobs now, for example, it’s likely that not as many people would have left the labor force, and so the actual unemployment rate would be north of 7.1%.
Which is true, but also possible is that the economic activity from those jobs and salaries (the multiplier) could have kept overall economic activity substantially higher and we would even be well below 7%.  They don't mention this but they should.  Nevertheless it is all speculation, we are where we are and the sluggish recovery certainly has a lot to do with all of the cuts going on at the state level these days.


Mike Jacob said...

Wouldn't more government employees be creating a net drag on the economy through the increased taxation required to compensate them?

Patrick Emerson said...

Yes, eventually the bill comes due. The conventional stimulus idea is that you spend now to spur the economy and pay later when you can better afford to after the economy is back on track. Of course states generally can't do this, but the feds could through block grants to the states.

Note that this is independent of arguing what the appropriate size of government is. That is a discussion for another day. The point is simply that as the economy is trying to get going aggregate demand keeps getting these negative hits through the shrinking government payrolls.

Unknown said...

There is already plenty of aggregate demand do you want people to spend like they did back in 2005-2007? That was fake growth.