I really hope Arnold Kling isn't actually this oblivious about the concern with state and local budgets, but he's been beating this drum for quite a while, so perhaps he is. He writes:
"That we do not need one penny of fiscal stimulus to save state and local government jobs. Just cut pay and keep the workers with the same budget. Everyone to my left seems to keep forgetting that option."
I think Kling would put me on "the left" so I suppose I'll answer for "the left". The concern is not:
(1.) Simply avoiding layoffs, nor is it
(2.) Closing budget gaps
The concern is maintaining effective demand. Of course we don't want massive layoffs of teachers, but simply preserving their jobs is not the goal. From a demand perspective, cutting pay while keeping jobs may be a modest improvement over the disruption of throwing more people out of work and keeping the rest at the same wage, but not much of one. Bottom line is - if you keep "the same budget", which Kling seems to think is such a virtue, you're keeping the same level of effective demand. Kling's solution does nothing and he just doesn't seem to realize it.
I agree we don't need one penny of federal dollars to solve the problem. What we need is for states to borrow whatever they can under current law (except for the basketcases like California, perhaps), repeal balanced budget requirements, and stop cutting budgets.
Pardon me for my ignorance, but how is "effective demand" different from simple demand?
ReplyDeleteIt's just a term that Keynes uses - it's basically "aggregate demand", not demand as in a single market.
ReplyDeleteI forget why he uses the term "effective" - he does provide a reason. But it's the same as "aggregate demand".