EconomicsWill a reduction in the federal workforce harm or benefit the washington D.C.

Government and Economics Downsizing government is again in the news as a policy issue. The website above is the from the U.S. Office of Personal Management and provides historical data on federal employment since 1940. As you see it has been steady at around 2 million workers since the early 1950's. Although there have been occasions when it declined 5% to 10% the number usually returns to the 2 million mark. This is the challenge that the current Administration must overcome with its proposal to reduce federal employment. The second article discusses the plans of the current Administration to reduce the workforce. It notes the size of the cuts are the largest since the end of World War II and discusses the reduction's impact on the Washington D.C. economy, which brings us to the readings for this week. In Chapter 9 Hazlitt discusses the usual fear that a reduction of the federal workers will create an economic decline. But as he points out the opposite is actually true. A reduction in the workforce also results in a reduction taxes, freeing money for increasedconsumer spending. This creates opportunities for new jobs and businesses, both of which increase activity in the economy. It will be interesting to see if this is the case with the current attempt to reduce the federal workforce. Next, one of the great challenges of economics and government is known as public works. Public works are the activities government do because they don't fit easily within the free market model. One of the great debates of economics is what are and are not public works. In economics, a public good is defined as a good or service which has a high free rider effect. A free rider effect is that someone gets to benefit from the good or service with needing to pay for it. The classic example are lighthouses. If an individual builds a lighthouse on a bluff overlooking the ocean to guide them to the entrance to a port it provides them with clear benefits, increasing safety in returning to harbor from a trip on the ocean. But because it is impossible to hide the lighthouse's beam from other sailors they also get to use it to reach harbor safely, even though they did not pay for it. This is the free rider effect of public goods. Public works is when the government chooses to produce the public goods to minimize the free rider effect. Again, using that lighthouse, the government builds it and charges a fee to any boaters using the harbor to pay for it. Of course, this misses those boaters that use it for just for navigation and don't the harbor, but it spreads the costs over a larger portion of those who pay for it.Fire and police departments are classic examples of public goods that started out as private services but then quickly became public goods because it was more efficient. The first fire department in the United States, in colonial Philadelphia was subscription only. If you subscribed they protected your property. If not then ignored it if it caught on fire. But since a unprotected house that is burning in a city may soon set a subscribers house on fire they subscription services quickly because public works with the local government charging a tax to pay for the service. This bring us to the current debate on government as discussed in Hazlitt, Chapter 4. What should and should not be a public work, paid for by government. National defense. light houses, police and fire departments are generally accepted as public works. But how about train service? In the United States, the government took over passenger train service in the 1970's as a public good (Amtrak), but many still question if that was a wise decision. Freight service remained private and is doing great today. In Europe almost all railroads, passenger and freight, are public works, something private truckers, airlines and bus lines object to on grounds that it is unfair competition. Is it? The second part of the equation is paying for the public service. Although owned and operated by the government they are still costs associated with public services. How to pay for these costs is the other economic and political debate that is taking place. No one really objects to everyone paying taxes for national defense, police and fire protection. But how about health care? Senior health care (Medicare) is paid for by specific taxes on income, as is the Social Security retirement system. But shouldeveryone in the United States be covered by government operated health care paid for with taxes as in Europe? That is another major current debate. The third part of the equation is that when you only have a single provider of a good or service you have an economic monopoly A monopoly is characterized by a lack of alternatives for those that use the good or services. You either accept it or reject it, often not a realistic option since you have no other choice. The problem with monopolies is that there are few incentives to improve either the quality of the good or service. The history of the telephone is a good example. In the 1970's when AT&T controlled the nation's phone system consumers had a choice of three different phone types, all hard wired into their home or business. They couldn't even change which room their phone was in. You accepted it, paid your money, and smiled. It was for all purposes a public good. Then the AT&T monopoly was broken up and folks had a free market choice. Today, because of this free market choice individuals now carry their phones in their pocket and it does more than just makes calls. It takes pictures, plays music, provides directions, takes pictures and videos, delivers email, allows you access to the accumulated knowledge of humanity on the Internet... All the result of one firm trying to offer better service, features and good then another in a free market. The purpose of this week's reading is not to solve a debate that has been going on since the nation was founded, but to return the economic perspective to it. Exactly which goods and services should be public works and which should be market goods? And what is the best way to paid for public works? For example, for roads andhighways. How do you pay for roads and bridges? User fees (tollways)? Vehicle registration? Taxes on fuel? General tax revenue? A combination of the above? (the actual solution in the U.S.). The answers are complex and involve political philosophy as well as economics, but since money is involved economics are going to always be an important element as will the discussion of the role of the government. Finally, there is the issue of Inflation, Inflation occurs when the supply of money increases faster than the supply of goods and services. It has been an issue that political economy has discussed and studied since the earliest days of political economy. Government often generates inflation when it spends too much money and needs to expand the money supply to borrow the funds it needs to spend. Inflation is something the current generation of economists are very sensitive to because of the high inflation during the 1970's and 1980's. During some periods it was in double digits. The inflation started when oil prices increased in the early 1970's. In order to provide the money needed for the increase in oil the money supply was increased. The problem was that it increased at a faster rate than the product of goods and services. The result was a rapid increase in their prices - inflation. The inflation continued into the late 1980's when finally the money supply was reduced to a level that was closer to the production of goods and services. In Chapter 23 Hazlitt discusses the basic principles and problems of inflation. He outlines the arguments and conditions that result in inflating the money supply, and theconsequences of it. It is a good primer on the need to avoid monetary policies that are inflationary. In Chapter 24 Hazlitt discusses the economics of saving. He uses the examples of two brothers. One spends his money foolishly and provides a short-term boost to the economy, while the other saves, providing a substantial economic impact. It outlines well the advantage of national policies that encourage saving