Listening to the radio last week and the finance “expert,” suggested laying off public servants would not help the US debt: “you just put those laid off people on unemployment,” he explained. “And lower your tax revenues. It would increase the deficit.”
Well, yes, when you lay off a public servant you add that person to unemployment, and yes they pay less tax. However, as their pay comes from the same government, and as they get less on unemployment than they do when they work, each public servant would be less of a net loss to the treasury on unemployment than working. So no, they wouldn’t increase the deficit, they would slow the growth of the deficit.
Of course, there are good arguments for not laying off public servants, and the above doesn’t take productivity into account. An “expert,” however, should know the difference between net effect on the treasury of public workers vs. unemployment.
I thought of that expert today when I read Nobel Laureate Paul Krugman arguing what the US economy really needs is a war with space aliens:
PAUL KRUGMAN, NEW YORK TIMES: Think about World War II, right? That was actually negative social product spending, and yet it brought us out.
I mean, probably because you want to put these things together, if we say, “Look, we could use some inflation.” Ken and I are both saying that, which is, of course, anathema to a lot of people in Washington but is, in fact, what the basic logic says.
It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal.
If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better –
ROGOFF: And we need Orson Welles, is what you’re saying.
KRUGMAN: No, there was a “Twilight Zone” episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time, we don’t need it, we need it in order to get some fiscal stimulus.
As the article linked to notes, claims of positive economic effect of WWII are extremely dubious, noting a 10.9% decline in GDP in 1946 the year after Victory in Japan. Huge increases in wartime spending through the 1940’s led to a massive decline in GDP by 1946.
But even if you accept the argument that WWII stimulous improved the economy:
If we discovered that… space aliens were planning to attack and we needed a massive buildup to counter the space alien threat… this slump would be over in 18 months.
My father in law likes to cite various experts to me when we end up discussing economics. I always argue with him, because the experts always seem to just be wrong.
Can’t wait until he starts quoting Pul Krugman to me
Brian Can be Found At Home In Hespeler