01 Aug 2012

Austerity Bask

Economics 11 Comments

OK kids, put your thinking caps on. I just spent an hour on the phone with a journalist for a household outlet, who is trying to give the “rest of the story” regarding the so-called fiscal cliff. He is saying that the conventional treatment of this story is, “Oh my gosh, if the government cuts spending at the end of the year, it will be so awful because all those people will get laid off and then they won’t have as much to spend.” So he wanted me to help him understand the offsetting benefits of government spending cuts.

We spent a lot of time walking through the economics of it, with me explaining the various mechanisms by which lower government spending could lead (eventually at least) to a stronger economy and higher standard of living. I told him upfront that first I wanted to make sure he himself believed in the story, and then we could worry about how to make it compelling to the masses.

One argument I used (in case you’re curious) went like this: “Look, we can all agree that it would be inefficient and make us poorer, if the government literally spent 100% of GDP every year, right? That would clearly be ‘too much’ government spending, on just about anybody’s criteria. So if we somehow found ourselves in that predicament, then it would have to be true that cutting government spending would be a good thing. Even though we could look at the businesses who saw their sales plummet, and the employees getting laid off, it would have to be the case that other businesses and individuals were benefiting, at least eventually. If we couldn’t point to such winners–to more than compensate for the short-run losers–then it must not be the case that 100% government control of the economy is a bad thing, after all.”

OK, so I think most of my readers will agree that this is a sweet argument. However, we can also agree that the average reader of a financial news story will roll his eyes and move on to “the real world.”

So here’s what the journalist wants: He wants to be able to actually interview and quote specific business owners who say, “Oh heck yeah, bring the fiscal cliff on! My revenues would go up 30% in the first quarter if the government cut spending 5%.”

See why that would really seal the deal for the average Joe reading the article? So please give me your ideas on this kind of thing. Off the top of my head, I only came up with three:

==> People in the health care sector who lie outside the official nexus. For example, chiropractors and more “out there” alternative medicine people, might see their business go way up if the government slashes its support for pain pills and other really expensive treatments. So can people give specifics?

==> Operators of vocational schools. If the government totally eliminated all federal support for higher education, then there would be a massive outflow of potential students from conventional 4-year colleges. Many of them might apply to trade schools to learn how to be a mechanic or whatever. Specifics?

==> Operators of small firms in Silicon Valley. If Halliburton, the Rand Corporation, etc. are laying off workers, there will be plenty of highly-skilled individuals who are now willing to work for a lot less. Specifics?

==> Other major categories of immediate “winners” you can think of?

11 Responses to “Austerity Bask”

  1. RPLong says:

    One group that springs immediately to mind – even though it sort of works against the story you’re trying to tell – is the so-called “shadow civil service.” The army of private contractors the government hires to do government work whenever there is a public-sector “hiring freeze.” There is typically a big boom in government contract work during budget crunches and stuff, because it’s a political “win” to move government payrolls off the radar.

  2. Anonymous says:

    – Farmers that don’t produce crops favored by the ag bill – same argument as the chiropractors, essentially
    – Criminals. Cutting police budgets would be lucrative to them I’m sure.
    – Private security firms and the airline industry, which draw on former military
    – Private schools, which could probably get teachers cheaper as public schools cut back
    – Anyone in the finance industry burdened by new regs whose enforcement might be understaffed.

    The common denominator in all these, of course, is either:

    1. An original distortion, which arguably on its own merits should be corrected even if it means no change in federal spending, or
    2. Some kind of specialized resource that would be released in a one-time supply jolt.

    I anticipate these people will say’s its good news. Whether it’s right or not – whether the state of the economy as a whole will sink them despite the advantages they’d gain – is a different question that I don’t know the answer to.

  3. Daniel Kuehn says:

    Ooops – submitted iwhtout a name listed. I had said:

    – Private security or airlines that hire formal military
    – Financial firms or polluters that would benefit from reduced regulator enforcement
    – Private schools that could get former public school teachers for cheaper
    – Criminals who benefit from reduced police budgets
    – Farmers planting crops that are not favored by the Ag bill (for much the same reason as your chiropractor argument).

    Now, I think these people would all say they’d benefit. In relative terms they probably would. But would they given what it would do to aggregate demand? That’s an entirely different question that these examples can’t really answer.

    btw – I don’t think you need to go as extreme as 100% government spending. Reductions under Clinton (I don’t know if they were actual reductions or just rates of growth – both matter if you’re talking in terms of % of economy of course) certainly helped the economy. The real question is, is today like the 1990s?

  4. RS says:

    Absent the bank bailouts and TARP, the fiscally prudent local small to medium community and state banks would have grown tremendously to fill in the gap leftover had the larger banks been left to face the music.

  5. David Barr says:

    Package delivery and courier services would probably see growth in business if there were significant cutbacks at USPS.

  6. Major_Freedom says:

    Hmmm, it looks like everyone here are considering cases of the form:

    If the government spends less money on “public sector program X”, then the private sector can spend more money on “private sector version of program X.”

    I don’t prefer to think in this way, because it sanctions the value of the general things which the government spends money on, and treats it as some sort of primary frame of reference from which we are to think and study and talk about. I mean, should we really try to defend the free market by saying something like “Oh don’t worry if the government reduces taxes and spending on tanks, drones, and missiles. For the private sector can then spend more money on automatic weapons, knives, brass knuckles and other weapons!

    I think what we should be doing is recognizing that primary values are individual values. If the government spends less money on pills or education, then because it might have come at the expense of more highly valued goods and services that are nowhere close to the things the government spends money on, for example healthier and higher quality food production, then we should say that when the government reduces its spending on “public sector program X”, then every conceivable alternative in the private sector becomes possible, not just those related to what the government originally spend money on.

    So if government reduces spending and lays off public sector econometricians and TSA agents, then they can become janitors, burger flippers, and everything else whose output is valued higher by market participants but couldn’t be had due to resources and labor being tied up in the government.

  7. MamMoTh says:


  8. Peter says:

    Regulators. Save the salary, while easing burdens on small business. Lots of concrete examples: overlawyered.com has a bunch of absurdities that should keep the audience amused and indignant in equal parts. Recipe for a great story.

  9. Kathryn says:

    This is sort of round-about, but I think it goes to Major Freedom’s point in a way.

    The combination of your 2nd (less higher ed subsidies) and 3rd (laid-off highly skilled workers) made me think of a twist. Businesses that need unskilled, reliable workers should benefit. Getting rid of unemployment insurance (and minimum wage laws) will augment this trend. Currently, young people who maybe should be working as janitors or waiters are instead going to college then insisting that their degree proves they should have a white-collar job, but are out of work. Austerity measures may increase the qualified pool of candidates for all sorts of jobs spanning from unskilled to highly technical.

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