The economics of mid-recession public sector pay cuts

[20000miles]

"Any quantity of money is just as good as any other quantity and it wont increase employment or the quantity of goods and services provided."

What?

I'm pretty sure you will get 99% of economists to not even slightly agree with that.

That said, I'm off to my local beemer dealership with a five cent coin, and I'll work hard to get him to buy into your view on quantities of money.

Well 99% of economists are wrong. If we all woke up with E10,000 under our pillows tomorrow morning, you'd think things would be hunky dory. However if you went to the shops you'd discover that prices had simply adjusted (upwards of course), and the value of your money has dropped dramatically.

Once a money is established, any stock of money becomes compatible with any amount of employment and real income. There is never any need for more money since any amount will perform the same maximum extent of needed money work: that is, to provide a general medium of exchange and a means of economic calculation by entrepreneurs.[COLOR=#0000ff][5][/COLOR]
But this means that any supply of money is optimal and, in that sense, that the supply of money is indifferent or "neutral" to the real processes of the economy. But, unfortunately, changes in the supply of money can have untoward and even devastating effects on the real processes of production.

No matter what Milton Friedman says there is no optimum quantity of money.

[20000miles]

Oh my God, we so can agree on that!


€2 billion taken out of the economy is 2 billion taken out of the economy. Willing or unwilling it's 2 billion taken out of the economy. Not just that, but there's a thing called the multiplier effect. I spend a tenner at the baker's, he saves €2 and spends €8 at the tailor's, he saves €2 and spends €6 at the bookie's, he saves €2 and spends €4 at the grocer's etc. €10 leads to €28 of economic activity. (Simplified example, but the principle applies)

Problem is: the multiplier effect works in reverse so the same effect turns a €2 billion reduction into a tsunami of nearly €6 billion of economic destruction.

So if Crusoe eats (consumes) 10 fish, 28 fish will magically appear? If Crusoe were to consume all his wealth (that is, if his MPC were 1) economic activity would be infinite and scarcity would end! It sure beats working!(Simplified example, but the principle applies, right?)

What is this brand of thinking you subscribe to? Keynesianism?

Until you realise the astounding idea that it is production that limits consumption, not the other way around, all hope is lost.

[Libero]

I have argued elsewhere that slashing disposable income prolongs recessions through the multiplier effect. The main point offered in retaliation is that the Government simply can’t afford to pay the wage bill and that we may be entering a deflationary cycle.

It’s a massive catch 22, so I proposed a 5% pay cut as opposed to a 10% paycut(which would pare back my standard of living to the absolute minimum) both to lessen the wage bill and lesson the multiplier effect. It’s the only compromise available to me as a citizen.

I also stated that I am more than prepared to facilitate any reform of work practices that can cut operational budgets as much as possible without detriment to the delivery of service. Perhaps here is an area that should be rigorously looked at ahead of pay cuts?

Fair play to you for being prepared to take a cut. It's a great pity, and a bad reflection on our nation, that so many people both in the public and private sectors will view you as a bit of an eejit for volunteering, but there you go...

As for the substance of your post and this thread, you are of course correct. Cutting wages depresses the situation further, prolongs the depression and actually hurts the private sector. There won't be many managers in retail, for example, looking forward to a chunk of their customers (public sector workers) enduring a pay cut.

But at the heart of Ireland's excruciating position is this reality: there is something usually worse than a prolonged depression - it's called sovereign debt default. When that happens, you get your public sector wage cuts anyway (along with all the downsides) plus a slew of braindead autocratic IMF restructuring policies. That's not much fun and probably requires public sector wage cuts to be avoided. Unless of course the public sector wage cuts have the effect of depressing the overall tax take even more and sending us into a deflationary spiral!

One thing's for sure: there's very little evidence-based talk on the policy we should adopt. Most comment is based on one's feeling towards the public sector rather than a cold hard assessment of the numbers. That shines through like the winter sun.

And for once, Cowen is more clued-in that most: the government of the day cannot simply dictate terms to the public sector. They have to be brought along slowly.

[feargach]

So if Crusoe eats (consumes) 10 fish, 28 fish will magically appear? If Crusoe were to consume all his wealth (that is, if his MPC were 1) economic activity would be infinite and scarcity would end! It sure beats working!(Simplified example, but the principle applies, right?)

What is this brand of thinking you subscribe to? Keynesianism?

Until you realise the astounding idea that it is production that limits consumption, not the other way around, all hope is lost.

You're so clever! You figured out, all by yourself, that the multiplier effect does indeed not function in an economy with a population of 1. This will be a very useful insight when there's only 1 person left on Ireland. However, for populations in seven figures, as always, the multiplier effect remains a well-proven, and rigorously tested fact.

[20000miles]

You're so clever! You figured out, all by yourself, that the multiplier effect does indeed not function in an economy with a population of 1. This will be a very useful insight when there's only 1 person left on Ireland. However, for populations in seven figures, as always, the multiplier effect remains a well-proven, and rigorously tested fact.

I see. On a desert island with a population of 1, production must come before consumption. However in a modern economy with millions of people it is consumption that is holding back production. Where and when exactly do the fundamental laws of economics spontaneously collapse in on themselves?

For a book that purports to be a 'general theory', Keynes book cant even explain a barter economy!

If youre still in any doubt I suggest you might read this:

[SIZE=1][FONT=Times New Roman][SIZE=1][FONT=Times New Roman][SIZE=2]Furthermore, he claimed that the MPC "is of considerable importance because[/SIZE][/FONT][/SIZE][/FONT][/SIZE]

[SIZE=1][FONT=Times New Roman][SIZE=1][FONT=Times New Roman][SIZE=2]it tells us how the next increment of output [/SIZE][/FONT]

[/SIZE][/FONT][/SIZE][FONT=Times New Roman][FONT=Times New Roman]will have to be [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]divided between[/FONT][/FONT]

[FONT=Times New Roman][FONT=Times New Roman]consumption and investment" (ibid.: 115 [emphasis added]). [/FONT][/FONT][FONT=Times New Roman]

[FONT=Times New Roman]The multiplier [/FONT]

[/FONT][FONT=Times New Roman][FONT=Times New Roman](k) [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]equals 1/1-MPC, and thus, he concluded, "it tells us that, when there is[/FONT][/FONT]

[FONT=Times New Roman][FONT=Times New Roman]an increment of aggregate investment, income [/FONT]

[/FONT][FONT=Times New Roman][FONT=Times New Roman]will increase [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]by an amount [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]which is [/FONT][/FONT]
[FONT=Times New Roman][FONT=Times New Roman]k [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]times the increment of investment" (ibid, [emphasis added]).[/FONT][/FONT]

[FONT=Times New Roman][FONT=Times New Roman]To use[/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]k [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]in support of "public works," the multiplier must have the mathematical[/FONT][/FONT]

[FONT=Times New Roman][FONT=Times New Roman]precision Keynes gives it (ibid.: 116). Yet this precision leads to logical[/FONT][/FONT][FONT=Times New Roman]

[FONT=Times New Roman]absurdities. Three absurd cases exist, corresponding to three violations of[/FONT]

[FONT=Times New Roman]Keynes's pronouncement that 0 < MPC < 1. As shown above, there is no[/FONT]

[FONT=Times New Roman]accounting principle that the MPC be bound in this way, and there is ample[/FONT]
[FONT=Times New Roman]evidence that the MPC is not so bound (see Table 4.1).[/FONT]

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[FONT=Times New Roman][FONT=Times New Roman]One absurdity exists when the MPC = 1 since, in this case, [/FONT][/FONT][FONT=Times New Roman]
[/FONT][FONT=Times New Roman][FONT=Times New Roman]k [/FONT][/FONT][FONT=Times New Roman][FONT=Times New Roman]is infinitely[/FONT][/FONT]
[FONT=Times New Roman][FONT=Times New Roman]large. Thus, any additional expenditure on "public works" would end scarcity![/FONT]

[FONT=Times New Roman]Keynes tried to avoid this absurdity by claiming that "prices will rise without[/FONT]

[FONT=Times New Roman]limit" (ibid.: 117). This was nothing but a rhetorical trick since Keynes had[/FONT]

[FONT=Times New Roman]defined his theory in real terms (wage-units). If prices are important in his[/FONT]
[FONT=Times New Roman]equations, then he should put them in and explain their role in the multiplier[/FONT]
[FONT=Times New Roman]process. Keynes could not do that because his entire theory falls apart as[/FONT]
[FONT=Times New Roman]soon as changing relative prices are recognized (Hazlitt [1959] 1973: 288-[/FONT][/FONT]

[FONT=Times New Roman][FONT=Times New Roman]318).[/FONT][/FONT]

[FONT=Times New Roman][FONT=Times New Roman][SIZE=1][FONT=Times New Roman][SIZE=1][SIZE=2]Even more damaging is the case where the MPC exceeds one (see Table 4.1).[/SIZE][/SIZE][/FONT]

[SIZE=1][FONT=Times New Roman][SIZE=2]In this case, the multiplier is negative![/SIZE][/FONT][/SIZE]


[/SIZE][/FONT]
[FONT=Times New Roman][FONT=Times New Roman]But Keynes claimed that more spending[/FONT][/FONT]
[FONT=Times New Roman][FONT=Times New Roman]always means more prosperity, not less. The final case is no less absurd. If the[/FONT]

[FONT=Times New Roman]MPC is negative (see Table 4.1), then [/FONT]

[/FONT]

[FONT=Times New Roman][FONT=Times New Roman]k [/FONT][/FONT][FONT=Times New Roman][SIZE=1][FONT=Times New Roman][SIZE=1][SIZE=2]will be a positive fraction. Thus, an[/SIZE][/SIZE][/FONT][/SIZE][/FONT]


[SIZE=1][SIZE=1][FONT=Times New Roman]

[FONT=Times New Roman][SIZE=2]increase in spending for "public works" gets partially consumed somewhere in[/SIZE][/FONT]

[FONT=Times New Roman][SIZE=2]the aggregate economy. But Keynes claimed that failure to spend leads to recession.[/SIZE][/FONT]

[FONT=Times New Roman][SIZE=2]His formula does not concur, nor can it be reconciled with his verbal[/SIZE][/FONT]
[FONT=Times New Roman][SIZE=2]pronouncements. Keynesians cannot have it both ways: either they must give[/SIZE][/FONT]
[FONT=Times New Roman][SIZE=2]up mathematical precision (rendering the theory null) or they must reconcile[/SIZE][/FONT]
[FONT=Times New Roman][SIZE=2]these absurdities with general economic theory (not possible).[/SIZE][/FONT][/FONT][/SIZE][/SIZE]

[/FONT]

[FONT=Times New Roman][FONT=Times New Roman][FONT=Arial]Source:http://www.mises.org/Books/dissent.pdf (pp. 78)[/FONT][/FONT][/FONT]

[FONT=Times New Roman][FONT=Verdana]Keynes was a poorly read, sham economist. More of a historian than anything, he made the mistake of thinking that economic laws are dependant on the era of time, not a result of the fundamentals of human action.[/FONT][/FONT]
[FONT=Times New Roman][FONT=Verdana][/FONT]

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[feargach]

Except Mr. von Mises is broadly dismissed by economists all over the political and philosophical spectrum. His views are to economics what the Natural Law Party is to elections: loud and ever-present, but not noticed by any practical people.

He is chiefly backed by the people who want the world to go back to the gold standard.

[feargach]

So, we're agreed: there's no economic justification, barring one based on the philosophy of Ludwig von Mises, for the current drive to slash demand during a recession.

[TradCat]

feargach

Slashing demand is not a good thing but borrowing isn't either because the money has to be paid back which raises taxation therefore slashes demand.

It looks like the Americans are going with you with your approach. They are going to spend their way out. Or try to. But that option is not open to us because we don't have our own currency. We are prevented by the eurozone rules from borrowing to degree necessary to maintain spending at current levels.

So we either raise taxes on the private sector which slashes demand anyway. Or we cut.

Or we hope the eurozone either changes policy to a US type approach of falls apart.

It is much easier to make the case against any proposal that is put forward in our circumstances. Because it is possible that none of them any any good. As this Guardian suggests

[20000miles]

Except Mr. von Mises is broadly dismissed by economists all over the political and philosophical spectrum. His views are to economics what the Natural Law Party is to elections: loud and ever-present, but not noticed by any practical people.

His colleague of the Austrian school, FA Hayek won the Nobel in 1974, so its not as if theyre that underground. They awarded Hayek the prize after Mises died so they wouldn't have to give it to Mises for the same thing!

He is chiefly backed by the people who want the world to go back to the gold standard.

Yes. Yes he is.

[20000miles]

So, we're agreed: there's no economic justification, barring one based on the philosophy of Ludwig von Mises, for the current drive to slash demand during a recession.

As I said repeatedly, demand does not drive the economy. A recession is not caused by a drop in "aggregate demand". Or by the "animal spirits" of investors in their "gambling casinos". As you can tell, those were Keynes' words not mine.

A recession is a response to an unsustainable boom that was set in motion by credit expansion and artificially low interest rates. A recession is the market reasserting itself: unprofitable businesses fail, workers are left jobless. Hence, the recession ends when malinvestments are liquidated and wages fall enough to re-employ the unemployed.

Mr. von Mises was right about money. I see you have stopped arguing your case and conceded "99% of economists" were wrong about money, and you have resorted to ad hominems against Mises instead of addressing the absurdity of the mathematical multiplier.

And you didn't tell me why, in a primitive economy, production limits consumption, but [FONT=Times New Roman][FONT=Verdana]"in the normal state of modern [/FONT][FONT=Verdana]industrial Communities, consumption limits production and not production [/FONT][FONT=Verdana]consumption" (Keynes 1936: 368) Or when the old rules don't apply anymore and the new ones do.[/FONT]
[/FONT]

Keynesianism isnt looking like a very good theoretical framework is it?