Commentary
I’m already hearing worry about the impact of mass layoffs from the civil service. Perhaps as many as 1–2 million or more people are about to be repositioned, probably with some severance, and that will surely have a disastrous impact on the labor market.
How possibly could all these workers, many of them with some talent but without much experience in labor markets as such, find new ways to be productive in the private sector?
Coupled with that are fears of the implications of suddenly cutting $2 trillion or more from the federal budget, about which Elon Musk has spoken.
Suddenly people are preparing the way to blame the Trump reforms for causing recession. However, consider that the conditions for inflationary recession are already here and have been for three years. None of the data that says otherwise is credible. Inflation is still eating away the value of the dollar domestically. Output never returned to growth following pandemic controls. Debt has soared: government, corporate, and household.
As this becomes more obvious in the coming half-year, anything the Trump administration achieves will be scapegoated by a screaming media ready to blame the new president for any and all troubles.
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This will be especially true for any actual cuts in government spending and employment. The truth is that we’ve never really had them in our lifetimes. Even the Reagan-era cuts were cuts in the rate of growth of spending, and even those fizzled after a few years in an exchange to spend more on the military.
That was truly a missed opportunity, and precisely why my friend David Stockman, director of the Office of Management and Budget, resigned in protest. Let’s hope the same thing does not happen again.
For now, the idea of actually purging the civil service and stopping the incredible debt increases seems real. Elon doesn’t have power but he might have some major influence simply by virtue of his platform and credibility as a slasher of bloat at Twitter.
We shall see. If they have any success, you can be sure that any and all hard times will be blamed on these cuts. Especially the labor cuts will come under fire, with a press ready to say that the downsizing is putting huge strains on incomes and wages, not just in the Beltway but all around the country.
You should know in advance: this is all nonsense. The economic theory that blames labor shifts from the public to private sector is full of holes. Vibrant markets are perfectly capable of managing even dramatic flows out of government employment into private employment.
We have a beautiful example from history to consider.
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The velocity of money plummeted in 1930 and never recovered, leading to a surge in savings. The Great Depression put a halt to prosperity, causing a two-decade period of deferred consumption where savings continued to grow.
After 1946, these saved resources were unleashed, sparking a manufacturing and investment boom. Unlike the 2008 financial crisis, this recovery was fueled by real savings rather than fake money, making it non-inflationary.
However, today’s low savings rates pose a challenge for economic recovery. The Trump administration must focus on freeing markets from administrative control and reducing public sector employment to boost economic output.
History shows that shifting labor resources from public to private sectors drives economic growth. As we face a wave of propaganda in the coming months, it’s important to remember this lesson.
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