I am attempting to ask this question as impartially as possible, setting aside the political and social ramifications.

Given: the shut down that began on March 2020, as a response to a contagious virus, known as COVID-19, decimated state and local tax revenues.

The Governor in reaction to discovering his tax revenues were well below his expectations asked all state employees to take a 10% pay cut. Additionally, he is asking for teachers to be retrained so that they can video conference their classrooms.

Meanwhile, some local politicians are reacting by drafting a stimulus bill.

I understand businesses respond to a crisis like this by not hiring as many employees and reducing salaries until they can ramp back up to pre-crisis mode.

My question is which of the following approaches is better for the economy at large, and what are their economic effects and why? And how long would it take for each one of these approaches to stabilize the economy? Is there another approach that I am missing?

  • A) 10% across the board cut in salaries to state employees
  • B) A laissez-faire response
  • C) A stimulus bill

From a simple and purely theoretical point of view:

Option (A) would give you a lower level of consumption and income state-wide and generally is a budget-balancing method, not an economic equilibrium-producing method. Option A is surely on the opposite side of the "policy target" spectrum, compared to B and C.

Option (B) is considered best when prices are not "sticky" - that is they drop quickly on a recession. Current data shows ( https://fred.stlouisfed.org/series/CP0000USM086NEST , https://ycharts.com/indicators/us_monthly_gdp ) that prices in the US have dropped but at a very lower speed than GDP, so I'm inclined to call them sticky.

(To put it bluntly: When that happens, people lower their food and medicine consumption, they get sick and die. Not the best idea. )

When that doesn't happen, and prices adjust quickly for the amount of income lost, equilibrium ensues. I'm inclined to say that this has never happened in the history of the human race, apart from closed experiments. At the very least, I know of no such case in modern economic history (that is, after the Renaissance till now).

Option (C) is the approach that is thought of as most successful when sticky prices occur, because a stimulus bill will put money in people's hands and consumption and production will return to their "equilibrium" level faster.

Critics of option (C) -which seems to be the most fitting at the time- cite concerns over inflation rates higher than those prior to the crisis, and also, there are problems concerning the distribution of money, that is, if no one pulls strings over the system. We wouldn't want to be ignorant over political matters.


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