Economists usually think that firms increase hiring when they see more demand for labor, but we have a new story coming from John Lott Jr, courtesy of Fox. Mr Lott argues that firms will hire more workers because the government is laying off workers.
Lott tells readers that:
"Democrats respond that government spending can’t be cut because it would eliminate jobs. Just the proposed $61 billion cuts by House Republicans in the current budget is said to “amount to a loss of 700,000 jobs.” The claim only counts the jobs funded by the government and assumes that this spending isn’t offset by the loss of private sector jobs. The notion is that if the government doesn’t spend the money, it never really exists."
Actually many of these lost jobs are not funded by the government. (The federal government only employs a bit over 2 million workers directly. It will not lose one-third of its work force as a result of these cuts.) Most of the lost jobs would be from reduced spending on private sector goods and services by the government or from reduced spending by workers who had formerly been employed by government agencies.
It is difficult to see how the government cutbacks would be offset by increased private sector hiring. If the economy were closer to full employment then we might expect to see interest rates fall in response to a cutback in government spending. This could spur increased consumption and investment, which would then lead to more hiring.
However in the current environment it is difficult to believe that these cutbacks would lead to any noticeable reduction in interest rates, nor that the reduction in interest rates would lead to any noticeable increase in spending. In other words, in the current circumstances it is likely that government cutbacks simply lead to a reduction in demand and employment as seems to be the case in the United Kingdom at present. (The OECD just lowered its growth projection for the UK this year to 1.0 percent. The UK adopted a Republican-type austerity program last summer.)