Pay Freeze

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I 100 percent understand the politics behind the President getting behind the idea of a freeze in federal civilian pay. If it were the case that political messaging gambits had an appreciable impact on election outcomes, this would be a smart political move. In the real world, however, they don’t and the real question is how does this impact the macroeconomy.

The answer, as I understand it, is that relative to other equal-dollar forms of fiscal contraction, this does a relatively small amount of harm. Which is to say that if you implemented a federal civilian pay freeze and used the money saved on job-creating stimulus, that you’d have a good policy idea. So for example you might want to propose a bargain that involved a spending freeze as part of a negotiating process. Instead, following the principle of “if it didn’t work the first 20 times let me try it again” the Obama administration seems to have decided that making preemptive compromises will strengthen their hand in some unspecified way down the road.

I’ll note once again though that for all the progressive huffing and puffing about rightwing misinformation, one very large challenge we face is that many Democratic Party insiders appear not to believe the New Keynesian diagnosis of the business cycle.