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The Williamson Plan for Economic Prosperity

January 22, 2011 Leave a comment Go to comments

Drum roll please…

Immediately reduce all government unemployment and retirement payments to zero, and then hire everyone who was receiving benefits to be a government employee with their wage being equal to the benefits previously received. Ta-da!

Ok, now let me show you why this ‘works’, taking the USA as an example. The latest Department of Labour statistics show the 4-week moving average of those collecting unemployment benefits in the US is about 4 million, at a cost of approximately $80bn a year. There are approximately 36m retirees claiming an average of $1,164 a month, which gets you to $502.9bn a year in social security payments for retirees.

First I’ll demonstrate the change this will bring to unemployment, currently standing at approximately 15m out of a labour force of 154m. The current unemployment rate is 15/154 which is 9.7%. My plan increases the number of employed persons by approximately 40m, and the labour force by approximately 36m. That gives us a new unemployment rate of 11/190 which is 5.8%. So I lied when I said it would halve the unemployment rate (mental arithmetic fail), but I have substantially reduced it.

But why would GDP change as well? Because government spending on unemployment insurance and retirement payments doesn’t count, but spending on wages of employees does. I’ll try to explain this as best I can, as it still sometimes does my head in. The point of GDP is to measure the total value of goods and services produced within a particular geographical area. This is why things like the sale of used cars don’t count towards GDP, and new cars do. Unemployment and retirement benefits are considered ‘transfer payments’, as the payment isn’t reflective of compensation for a good or service produced, and aren’t counted towards GDP.

In the private sector, the value of what is produced is determined by the price at which it is sold, and this is what counts for the purposes of GDP. But this clearly cannot work with government, as the government doesn’t (for the most part) sell goods and services. The value of what the government produces is instead booked at the cost of its production. This gives a huge advantage to the government in the argument over who can best ‘stimulate the economy’, as it doesn’t matter to the GDP figures how that money is spent. The private sector only ‘stimulates the economy’ when it puts resources to good use in the production of goods and services that people are willing to actually pay for. If the government pays 10 people to dig holes and 10 more to fill them, it ‘stimulates the economy’ in terms of boosting GDP, more so than if we gave those same 20 people unemployment benefits, but it doesn’t create any value1. That the former counts towards GDP and the latter does not is completely arbitrary from a standpoint of how well-off we may or may not be2.

I get so frustrated by the ease with which we bandy about numbers with precious little thought as to what they actually mean. I hope to have shown in this post how the government’s contribution to GDP is not necessarily representative at all of the value created by its spending decisions.

1This is not strictly speaking true, paying people to do something is usually preferable to paying people to do nothing – if only psychologically for those concerned

2This is why I am a little bit sceptical of one part of Felix Salmon’s praise of the Nordic economic model. Sure unemployment at Norway is at 3.5%, but what would it be if the government fired all the workers with zero marginal product and instead paid their salaries as unemployment benefit? That being said, the piece Felix cites is very much well worth reading about what is actually the best policy for fostering entrepeneurship. Also read Scott Sumner on Scandinavian socialism.

Categories: Economics, Policy

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