On the surface, this makes sense. But is this as deep as we should look at the matter? I have a few questions, and a few answers:

1. Where does the money come from to pay federal employees? It comes from taxes and borrowing, and borrowed dollars must be paid back with taxes, so in reality it’s all taxes, it’s just a matter of whether it comes from today’s taxes or tomorrow’s taxes.

Taxes to pay federal employees are taken from the private sector, which means players in the private sector have less to spend. In other words, if a federal employee buys a Big Mac, you could say that Big Mac purchased is one less Big Mac bought by a privately employed person. Or in other words, it is at best a neutral matter. That is, if the federal employee no longer buys a Big Mac, then that theoretically means the privately employed person still has the money to buy his, which he would not have bought had that money gone to pay the federal employee, and therefore the federal employee’s paycheck is not a benefit to society, economically speaking.

2. What would all those federal employees do, once let go? As it stands, federal employees are almost always a drain on the economy. Sure, they provide goods and services, but in almost every situation these goods and services could be provided at a higher level of quality and at a lower price by the private sector. Just think of the postal system, public education, etc. Money is taken from the private sector to fund the provision of these goods and services, but what we get back is rarely, if ever, as valuable as what we give up.

Thus, let us suppose that a federal worker making $80K loses his job because the job itself is axed. This is $80K that is no longer being taken from the private sector. That money stays in the private sector, and is spent by private individuals, or saved and therefore invested. Either way, it benefits the economy, probably more than if it went towards whatever that employee was providing. But let’s say it’s equal, just for the sake of argument. The thing is, things don’t stop there. What will that federal employee do? He needs to earn an income, so he will now go find a job in the private economy. In order to find a job, he will have to prove that he can provide more value than what he gets paid. Now, he is contributing to the economy and helping it grow, whereas as a government employee there was no growth, and most likely contraction (I’m really going out of my way to give the benefit of the doubt here–I don’t believe for a second that the government helps grow the economy, I believe it’s a humongous drain).

So not only is the economy benefiting by saving the $80K, but it also gets the benefit of that federal employee providing services that make the economy bigger and better. It is a net gain for the economy and society as a whole.

In other words, losing a million federal jobs would be an enormous boost to the productivity of the country. So what’s the holdup? Well, the hard part is that it wouldn’t be immediately obvious. It might take a few years. And in the meantime, although there would be positive effects, there would be a lot of displacement and there would indeed be painful shockwaves. When men stopped wearing top hats and the top hat manufacturers went out of business it was painful for those whose livelihoods depended on that industry. They had to find new jobs. Suppliers of raw materials suffered. But the economy adjusted, things went on, and they got better, since top hats don’t provide any real benefit in terms of standards of living. Likewise, there would be a lot of people out of work. But even if the government gave them half their pay for four years, or paid for them to go to college and get re-trained, or offered other generous severance packages, society would still be ahead, even in the short-term, since we would be saving an enormous sum that would instead stay in the productive part of the economy, and we would have an enormous new source of human talent available to work in the new jobs that would be created with the increased levels of money available for investment. It would be a painful adjustment, but well worth the pain. The trick would be to make it through those few years until it would become obvious that we’re all better off for it.

Now, if you think I’m off somewhere, let me know. I’m sure someone has expressed this better than I, with more references to math, and I’m sure there are some good rebuttals as well, which I’d love to read.