What are the economic after effects of a 10% pay cut to all state employees?
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 &quot;policy target&quot; spectrum, compared to B and C.
Option (B) is considered best when prices are not &quot;sticky&quot; - 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 &quot;equilibrium&quot; 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.