Wednesday, January 27, 2010

L.A. city officials need to think twice about layoffs

Los Angeles Times opinion "L.A. city officials need to think twice about layoffs" (January 27th, 2010) provides an inconceivable suggestion. The article discusses unemployment in Los Angeles. It quotes a member of the mayor's office that suggests the mayor's office would print money to pay for full employment if it could.

Another senior member of the mayor's team, who asked not to be identified, put it this way: 'If we were the federal government, we'd simply print more money and keep everybody working, but we don't have that choice. People are your largest fixed cost in the public sector, and we don't have any choice but to reduce their number'"

If it wasn't in print today, Corrections would have believed that this sort of thinking died as its run grew long. The consequences of printing money to the Weimar Republic in 1923, Hungary in 1946, China in 1949, or Zimbabwe in 2004-2008 should have expelled this folly as a real consideration from the minds of all men.

Inflation is a monetary phenomenon.  When the government prints more money, makes it available, or credibly is expected to increase the money supply, higher prices result and the currency is devalued.  In the mean time, if money growth impacts transaction costs, as may happen when growth is very high, then real production may shift downward.  We would, for example, expect a shift to household production and other non-monetary activities.  We help create a sclerotic economy that further worsens our problems.

This is not, however, the end of our problem.  Were this the case, then we note that Tiebout sorting can take place--individuals with the most to gain from moving to a place or country with low transaction costs will be individuals who do the most activity in the marketplace.  This offers an additional loss to the sort of hyperinflation that the Los Angeles Times opinion editorial will bring about.

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