Cuts and Crisis

As many of us are experiencing: Europe and other large economies are in a great economic crisis. One of the consequences of a crisis of this magnitude is the high deficits that many governments are now running, threatening their solvency. An obvious answer to this threat is reducing deficits by cutting costs, reducing benefits and increasing taxes.

In this post I will deal with the first method of cutting: cost reductions. In most government programs this is simply firing civil servants or 'reducing bureacracy'. This seems a good idea: reducing a deficit by getting rid of unproductive labor. Unfortunately things are (almost) never as easy as what they seem. What happens with cutting programs is that civil servants get fired, but because they can't find another job they need to be supported by the state. This means in effect that you, instead of paying a salary to a working person, pay a benefit to a not working person. This effect greatly reduces the effects of cutting programs even when they cut only unproductive civil servants.

But wait, it gets even worse: cost cutting programs take specialists to asses and implement the programs, especially when they involve larger scales. Many governments do not have these specialists amongst their own staff so they will need to hire them from the private sectors. These specialists (now called consultants) do not come cheap. An ironic situation now occurs: the government is paying high costs to get rid of low salaries. And this, of course, leads to even less cost reductions.

The final problem with cutting personell in time of crisis is that large reorganizations often reduce productivity temporarily(lets assume, contrary to reality, that it is not a permanent reduction). The reduction comes from the fact that people and therefore organizations learn to act within an organization. When that organization rapidly changes people need time to adjust to the new organization, leading to less productivity temporarily. This is bad, especially in a crisis. In crises people need to be able to trust the government and are relying on its stability. Therefore a reorganization of crucial sectors is precisely the opposite of what a government should do.

In conclusion: even though cutting civil servants seems to be a good idea to reduce the governments deficit, it probably is better to get money from somewhere else if you are in a crisis.