The downward trend in layoffs –which began in mid-2010 and persisted through this January — appears to have been decisively broken. An unfortunate but understandable feedback loop appears to be at work. Today’s Wall Street Journal describes it this way:
The cuts . . . reflect the shifting outlook of employers, many of whom had expected the economy to gain speed as the year progressed. Instead, growth has faltered. If the pace continues to disappoint, more companies will feel pressure to pull back.
This explanation of employer behavior reinforces my view that the forthcoming cuts in the federal budget will have the opposite of the intended effect. To repeat what I’ve said before: if the government’s out-go is reduced, so will be the private sector’s in-come. As the budget reductions take hold, the level of employment will fall below what it would have been in the absence of the budget cuts. The economy will lose — not gain — speed. Economic growth will falter further and “more companies will feel pressure to pull back.” Simply stated, the budget cuts will reinforce the feedback loop. The larger the reduction, the greater will be the reinforcement.
Dave Schuler says:
I think it depends entirely on the nature of the cuts not just on their magnitude. Deadweight loss.
July 21, 2011, 2:29 pmMarc Schulman says:
Dave — I have to respectfully disagree. Even people who do worthless work get paid. If they get fired, they’ll spend less, the same as people who do worthwhile work. Your comment is a propos with regard to economic efficiency, but not to aggregate demand.
July 21, 2011, 3:33 pmRich Horton says:
Marc, I’ve thought a lot about this stuff since I read your piece about 1937 and while I see your point, something seems to be missing. I don’t see the money we have spent in the last three years being as useful. We have largely thrown a ton of money at two sectors, financial services and state/local governments (including schools.)
Obviously the trend in military spending (outside of that spent for ongoing overseas operations) has been steady if not declining. All indications are it will be reduced. Spending on infrastructure was pretty anemic, partly because of a lack of “shovel ready” projects and the unpopularity of some of the programs of emphasis (such as high-speed rail – a program I wish Republicans would support but which they just view as a boondoggle), but mostly because there was already such a pent up demand for basic maintenence programs what was spent on them felt like treading water and not an engine for growth.
The fear is we are heading towards a system where local governments and school districts are permanently dependant upon state/federal aid to keep basic services running. This argues for a real structural problem in the state/local budgeting, and the source of that problem is pretty obvious. The single largest expenditure item in every state is K-12 education (nearly 30% of state budgets.) But try and question the way they spend their money and you are made out to be a monster putting a gun to little Tommy and Suzie’s head.
And this, for me at least, marks the difference. In the 30′s we could see where the money was going. We had something tangible at the end of it.
What can we see today? New York area schools are spending $26K per pupil every year (see http://www.cato.org/pubs/pas/pa662.pdf), but claim they dont have enough money to guarentee students have textbooks. This money seemingly disppears down a black hole in a state budget and never reappears anywhere else.
It would be one thing if I knew that every $1 spent by the federal government as aid to K-12 education resulted in $1 more (or something close to that) in buying power for some employee in the K-12 system. But who can be confident that is the case?
It seems much more likely that local governments and school districts are inefficient objects needing reform rather than dependable engines of economic growth.
July 21, 2011, 5:50 pmMarc Schulman says:
Rich — While I wasn’t alive back in the 1930s (I’m not that old!) to witness the New Deal public works projects in real-time, the evidence is still all around us — bridges and the like. I know that the stimulus program has saved some public-sector jobs; but, unlike in the New Deal era, I can’t see anything. Maybe people would be less critical of the program if they could see its results with their own eyes. Our infrastructure is certainly decaying; to say that there weren’t enough shovel-ready projects is to beg the question. Why has there not been a greater effort to accelerate them?
As for the financial distress of state & local governments, my reading indicates the major problem is that their incredibly liberal pension plans are bankrupting them.
July 21, 2011, 7:28 pmRich Horton says:
THe trouble is making projects shovel ready has become more difficult. Up where I live there is a proposal for a bridge project that is almost 15 years old and got a final OK during the Bush years, but not the money. What happened during the stimulus period? Instead of kickng in the money to get what WAS a shovel ready project going, the Obama admin. blocked the project by having its existing enviornmental impact ruling overturned. Now we have a bridge project with bi-partisan support in the House and Senate going nowhere fast, and I know this isn’t the only one.
As for the pension plans, I think it will be a state by state issue. Here in Wisconsin the state pension system is in fine fnancial shape, ranked as the second strongest in the nation. I’m sure there are systems that have been managed less responsibly, and those will also need to be addressed – though its a hard thing to do politically as it opens one up to demagoguery pretty easily.
July 21, 2011, 7:54 pm