Not Terribly Original of Me, but It Must be Pointed Out to the Gray Lady

by Don Boudreaux on March 7, 2010

in Reality Is Not Optional,Seen and Unseen

Here’s a letter to the New York Times:

Paul Krugman says that it is “bizarre” during today’s downturn to worry that unemployment benefits reduce people’s incentives to find jobs — indeed, that this concern is even at odds with “textbook economics” (“Senator Bunning’s Universe,” March 5).

Prof. Krugman must count himself and his wife, Robin Wells, among those who hold bizarre ideas – or who, when writing economics textbooks, misrepresent economists’ views.  Here’s what they wrote on page 210 of their jointly authored textbook Macroeconomics (2nd ed.), published in 2009: “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . .  In other countries, particularly in Europe, benefits are more generous and last longer.  The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job.  Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.”

Sincerely,
Donald J. Boudreaux

(HT to Walter Williams, who sent me James Taranto’s smackdown.)

UPDATE: I’ve modified the opening paragraph of my letter, and have sent the revised version to the NYT.  I do not, though, see that it changes anything substantive.  It remains over-the-top misguided to label as “bizarre” the concern that the disincentives that unemployment benefits unleash on searching for and accepting employment might outweigh any pro-employment stimulative effects of these benefits.

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  • CIP
    Conservatives like to make this argument, and it's not totally without merit. Suppose that you don't like the idea of potential workers loafing on the dole but aren't quite down with limiting them to the options of steal or starve. So why not replace unemployment with government funded jobs doing something socially useful.
  • Nota Bene
    Not to suggest I disagree with the general concept, but unemployment isn't a problem right now with people not *seeking* jobs. They just aren't there to be had.

    I am a trained and very talented professional, but, on paper, I'm at the lower end of the "let's hire" scale. I'm older, and there is the automatic presumption of my skills and abilities being dated. They're wrong, but if I can't even get the HR people to pass me along to be *interviewed* right now by the Decision Makers, I can hardly make that case to potential employers. I have applied for literally hundreds of jobs and gotten virtually no interviews for a good nine months.

    OTOH, all of my work history for 25+ years is professional. That means that I can't GET other non-profession related employment. Why should they hire a professional who "six weeks after I hire you, you'll get a much better paying job in your profession?". And YES, in the past, I've actually had someone tell me that, after agreeing that they had no doubt whatsoever I had the ability to do the job in question. And that was when the unemployment level was much lower. Now that same company has its choice of workers. So they're even less likely to consider me.

    My UBs are around a quarter of my professional salary, and no benefits. It's enough to keep me from being homeless and starving, but not much else.

    UBs in the USA are not sufficient, I don't believe, to discourage anyone from finding work if it is available.
  • aussieBComm
    It is typical of what Krugman writes that he twists facts to suit his own agenda.

    There are a couple of separate issues involved in this whole discussion. First of all, I do believe that unemployment benefits can work as a disincentive for the unemployed to find work. This is because the unemployment benefit is often higher than the wages earned by that person in the first place. (I am not necessarily talking about in times of deep recession).

    The reason that this is the case can be due to the additional "benefits" that the unemployed person receives. For example in Australia the person is entitled to a slew of entitlements because he or she is unemployed including medical, transport, utility type benefits. This applies unless one is married and the partner earns above the means tested limit - then it is nothing, nada... get lost charlie type attitude.

    Second, if you read my last sentence here you can see what happens when people adopt an "entitlement" attitude. This is not intentional for me, but it truly irks that people on benefits actually do very well whilst the rest of us, even amongst those who are not working continue to struggle with paying full price for everything. In other words, what I am trying to show here is that when people get all of those benefits they are in fact often loathe to get work because of the cost of the benefits that they lose.

    Unemployment benefits are needed in times of high unemployment but they need to be applied in a way that does not cause people to drop out of looking for work. Sending people along to jobs where they are ill-suited is not a good thing in the long run. For example, when I first graduated from university this was in the period of the stagflation of the 1970s and not even graduates could find work. My personal experience with the Govt employment people happened to be that they could not really care about the unemployed in one respect. As a professional I went to their professional office for help to get work, and was sent to an interview at a company where a much older woman was required for the job. Nothing like being rejected for being too young, being a woman, and also for having a degree instead of a diploma - all of them are bad reasons for not giving someone the opportunity to work. Anyway, if I failed to go to the job the small amount of benefit that I received would cease. There were other strings attached to getting the smallest amount of allowance. Needless to say I never went back to that office!!

    Since I am looking at the Australian experience, I need to compare attitudes under the ALP and the Libs. There is a distinct difference because under the ALP there are heaps of benefits given to the unemployed, as well as single mothers. The benefits have been such that a person offered work will often weigh up the economic benefits - what is given up by working includes cheaper gas and electricity, cheaper medical and pharmaceutical, free public transport etc. compared to the cost of paying the full price for everything. If the person is a single mother there could the additional child minding fees on top of that. All have to be taken into account, and all of these factors will determine whether someone decides to stay on welfare or decides to take the offer of employment.

    However, in the present climate one cannot make value judgments because of the economic conditions. On the other hand, I believe that those shovel ready projects should be in the hands of private enterprise, and that the incentives should have been the type that help private employers create jobs rather than have ditch diggers being paid by Government.

    A useful comparison in Australia is the time it takes for a government road building project to be completed compared to a private industry road project. The private contractor can get the job done in half the time, and I might add can get the job completed ahead of time (YES it really happened with the M7 which is a toll road in Sydney, it finished ahead of the projected date, and it was a private consortium project).

    In other words, I do think that Krugman is wrong in his column, but correct in his textbook - unemployment benefits can create disincentives to find employment. The longer one waits to get a new job the harder it is to keep going.
  • cpklapper
    The NYT never prints my letters, though TWP often does. Hope the venue works for you. In any event, Krugman's textbook is not exactly right. It is the difference between what you get in unemployment compensation and what you get from the government when working ($0) that forms the disincentive. When the net compensation from a prospective job (salary minus the cost of commuting, taking meals at work, value of time spent at home writing the next bestseller or inventing the next industrial marvel, etc.) exceeds the unemployment compensation then it is economically rational for them to take the job. Note that this has nothing to do with laziness; they are just not being stupid. Note also that if your remove the entitlement requirement, you also remove the disincentive. (hint which will never be taken)

    One final observation, about the need to increase to demand, about which Krugman makes a disingenuous argument about the unemployed not spending enough. The reason the unemployed do not spend enough is because they have lost their jobs which, in turn, is because the credit markets seized up for small businesses especially, which was caused by trillion dollar kickbacks to the campaign contributors. And what party dominated Congress for both bills, the Bush bailout and Obama stimulus? The Democrats. *pause to hear the whines from Krugman about how "you Republicans" didn't do any better or far worse* I am a Populist and neither party is listening to me.

    In any event, that is how I would have addressed the latest sanctimonious cow chips left by Krugman on the opinion pages of the NYT. Hope your letter makes it in, though, as it may serve to deflate his ego to a more manageable size.
  • Ryan Vann
    I rarely find myself in agreement with Krugman, and I agree most likely for different reasons (the aggregate demand stimulus argument isn't convincing to me), but in this instance, I think Don is being pedantic.

    While it is certainly true that UE benefits, if set with significant magnitudes, can retard incentives to work, one has to consider the circumstances.

    Does anyone honestly beleive that, were UE benefit extensions to end today, UE numbers would drop in the near to mid term? Even if we assume this, is there any reason to believe that these newly employed people would be laboring in their optimal capacity? If you believe in a restructuring narrative (which I certainly do) UE benefits can actually be beneficial in buying time for workers to locate their best opportunities for employment.
  • vikingvista
    Payouts to the unemployed ARE beneficial--to the unemployed. It's the costs that politicians diminish, and that keynesiacs think are actually economic benefits.
  • Marcus
    Let's face it, Krugman calls it bizarre because he is a partisan. Plain and simple. It's too bad really, because now the actual economics points have been lost in all of the political rhetoric.

    Though perhaps there is another 'economy' involved here. The use of the word 'bizarre' sure has garnered him a lot of attention.
  • vikingvista
    Krugman makes economics points? I thought he was a keynesiac.
  • nailheadtom
    No one seems to realize that the secondary recipients of unemployment insurance benefits (beneficiary spending) are going to be a. mortgage holders and landlords and b. automobile financing companies. Thus these funds are not going to be used primarily for discretionary consumer spending but instead for ongoing obligations. UI is just as much an insurance policy for mortgage and finance companies as it is for workers. It also discourages savings, particularly by seasonal workers, that would otherwise be used to offset unemployment.
  • Gil
    Of course, others here are beating around the bush - a free market should have no unemployment payments, the employer should have no restrictions in hiring and firing and there should be no artificial barriers for a new business.

    If there was a free market and there really were five people for every job then the price of labour should fall by 80% making labour dirt-cheap and allowing employers to hire more people. In other words, unemployment should be very low in a free market - the labour market should adjust itself quickly to changing market conditions. Of course, unemployment benefits cause this process to slow down - if people have a fallback optiion then they usually fall back. However the minimum wage also hampers the process as there will times when labour has to be cheaper than the official decree. Just those who 'can't swim' learn to swim in a heartbeat when they are thrown in the deep end so too will the 'umemployable' will miracously find jobs if their payments are cut off immediately.
  • LowcountryJoe
    Um, five currently non-employed persons vying for one published income-earning opportunity is far different than a five to one ratio across the whole labor market. And that's if you buy into the hyperbole of that statistic in the first place.

    And of course there are times when the minimum wage rate hampers a business from employing a worker who, when factoring in all obligations of employer, might not bring enough value to the table to overcome the risk and full cost of a potential employee.

    Why should it be that people who are thrown out into the water be completely stuck? I mean you and people like you that care so much are there to help, correct? There are lots of progressives are there not? Or is it easier to be progressive with someone else's money mixed in with just a little of your own?
  • Gil
    I was just saying in a free market there would be little unemployment because there's no incentives to be out of work. To achieve such a condition unemployment benefits would simply be dropped and ideally the taxes to pay them would be cut in kind.
  • vikingvista
    Yes, but your numbers were way out of proportion.

    Unemployment isn't a phenomenon of a free society. People between jobs for a couple weeks don't typically think of themselves as unemployed. And keep in mind that labor is capital, and with declining wages, capital is cheaper, and consumer prices drop. In a recession, wage declines do lead, but wage drops are at least in part mitigated by dropping prices (again, assuming a free market, not one distorted by fiat money central banking).

    But the most important thing, is that recessions are centered around a particular industry. Not all wages would fall the same. It would be disproportionate near the industry leading the recession. Other industries, particularly the one's benefiting from the released capital--the one's that will lead the economy out of a recession--likely have some positions with increasing wages.

    The free market wage flexibility, as opposed to state-imposed unemployment, is what allows people in the fading industry to achieve some means while they transition to a recovering economy. And of course without state intervention, that recovery tends to come a lot faster.
  • iamse7en
    This is phenomenal. The more Paul writes, the more he loses credibility as an economist.
  • I'm afraid your misrepresenting Prof. Krugman here.

    I'm sure he stands by his textbook. He doesn't think that people holding the belief of disincentives is "bizarre." It's a brute fact that a disincentive is created.

    What is bizarre is that that argument even matters in the face of 9.7% national unemployment.

    There may be disincentive created by extended unemployment benefits, but there has rarely ever been greater incentive to look for a job in today's economy.

    -Justin
  • SheetWise
    "There may be disincentive created by extended unemployment benefits, but there has rarely ever been greater incentive to look for a job in today's economy."

    With an increase in the effective marginal tax rate, how do you come to this conclusion?
  • That claim is based merely on record unemployment rates.

    I won't deny that there is a incentive role for the effective marginal tax rate, but I doubt that it is calculated by the average unemployed worker, or if it has a SIGNIFICANT role in that worker's motivation to work.

    The significance of these theoretical incentives is what Krugman is balking at, not that they are still believed to exist.

    Would you mind submitting a case that the effective marginal tax rate is significant?
  • SheetWise
    It depends on how you measure it.

    Let's say I'm working in California and making $900 a week -- or $45,000 a year. I get laid off, and the state now pays me $450 a week, or $22,500 a year. But, I never really received the $45,000 a year because of state taxes which took about 5% and insurance deductions which took out $500 a month. On unemployment the government pays my insurance and state taxes don't apply to unemployment. So the real tradeoff is now about $36,750 to $22,500. Now figure that my commute to work was about an hour each way, and I live 15 miles from my work. It costs about 50c a mile to operate a car, and I was driving 30 miles a day -- so that's about $15 and two hours a day. 250 commutes a year at $15 each is another $3,750 I'm saving -- so it's now about $33,000 to $22,500. This means that I'm really only losing $10,500 by not working. Since work took up about 50 hours a week of my time, and I worked 50 weeks a year that's about 2,500 hours a year. So the real difference between working and not working is really only about $4.20 an hour.

    But when I was working, I was being paid $22.50 an hour. I would put the tax rate at a little over 81%.
  • So, the question becomes, are you looking for work?
  • SheetWise
    That was a hypothetical.

    But I know a lot of people who aren't.
  • Isn't Krugman thinking in the big lump of clay type of unemployment?
    Specifically, UI wouldn't increase unemployment for housing construction workers, since construction work was hit the hardest in this recession, most of them can't find a job because the supply of labour is to high. But take another field, like accountants, which are still in high demand.
    UI would increase the unemployment rate for out of work accountants, since they CAN find work much easier than an out of work construction worker. I think that's what Bunning was talking about, but I don't know because unlike DK I'm not a mind reader.
    What about the supply side of the equation? What do UI taxes do to the employers that pay them? Simple "textbook" economics would say that if you tax something you get less of it. So when you tax jobs to pay for UI, you get less jobs than you otherwise would.

    Then again any line of thinking not like Krugman's is probably "bizarre" to Krugman.
  • SheetWise
    Apparently the work of Arthur Laffer is dead. Are the considerations of effective marginal tax rates and their incentives to employment no longer considered?

    Many of these issues -- to me -- are as calculable and transparent to reality as others would propose is the calculus of Keynes.

    In the end, some theories can survive challenges to their intent, and fewer can survive challenges to their truth.
  • It's a good thing we have intelligent people like Krugman and DK around to let us know when it's good to open Pandora's box and when it's bad to open Pandora's box.

    There seems to be an implied assumption that there only a couple of important variables here - job openings and unemployed. That seems to be too simplistic of a view.

    How many avoid starting their own business because unemployment pays more? How many jobs would those people create over the next 2-3 years if they did start their own business?

    How many avoid accept a lower paying job because unemployment pays more? How many people are employed "off the books"?

    Are there any concentrations of unemployed? For example, is it spread evenly across all income groups or is it concentrated in any particular income group (based on what they made before they were unemployed)? I've seen data that shows heavier concentrations in low income groups. I wonder if that might be due to the minimum wage.
  • sethstorm
    The problem is that not all unemployed have the same ability to "suspend disbelief" and start a business. That is, it takes a certain ability to disregard one's own morals and beliefs to do so.

    While it may be an answer for the few, it is not a blanket answer to the problem.

    Both groups are acting rationally to fight wage compression.
  • sethstorm
    It's not the profit motive.

    It's the willingness to believe in enough social Darwinism to run a business, but at the same time not believe in it. It happens independently of the profit motive.
  • SheetWise
    "That is, it takes a certain ability to disregard one's own morals and beliefs to [start a business]."

    I'm curious as well. I'm assuming the profit motive is the culprit.

    Colonel Mustard with the Profit Motive in the Board Room.
  • LowcountryJoe
    Professor Plum in the lavatory while leaving an unflushed sethstorm comment.
  • danphillips
    I'm curious to know what morals one has to disregard in order to start a business?
  • LowcountryJoe
    A great question that will probably go unanswered if he's smart enough to dodge it. I would really enjoy hearing the answer, though...so as to remove all doubt, of course.
  • vikingvista
    But nearly all of the unemployed have the ability to find someone who would pay them SOMETHING to do SOMETHING. As much as unemployment transfer extortions reduce incentives on the supply end (labor), regulations and state-enabled liability reduce it on the demand end (hirers). The result of state actions on both ends is higher and longer unemployment.
  • All this talk skirts the issue that if people weren't paying so much for government, and if fiscal policy were had not been discouraging of savings, then the spike in fuel prices would have been taken in stride rather than pricking the housing bubble.

    The cost of government keeps more people closer to the edge of fiscal solvency than they would be were government much smaller.
  • David
    Krugman's beliefs, as espoused in the NYT, are what I find "bizarre". Another sentence which shouldn't be discounted is:

    What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits...reduces unemployment.

    I understand that Krugman is saying the unemployment benefits will be spent, but then is it any different from dropping money from a helicopter? Wouldn't people also spend from their savings/retirements? There is quite a lot of "textbook economics" that indicates that giving people unemployment benefits reduces the incentive to find a job. In fact, I don't see anyone dispute that point. To say that the unemployment benefits will somehow stimulate the economy back into employment and greatly overshadow the disincentive they provide seems bizarre to me. More likely, you'll just see people running the course of the extended benefits and then attempting to find work. This will only raise unemployment and de-stimulate the economy. After all, people tend to make more money when they have a job than when they don't.
  • In a lot of ways no, it's not different from dropping money from a helicopter...but textbook economics also tells us that a helicopter drop would increase employment in the short run if people spent the money. The difference is that unemployed people are likely to spend the money immediately whereas the helicopter has some chance of dropping the cash over Bill Gates' house or something.

    There's a great line form The Simpsons that illustrates this point. Mr. Burns wins $1 million in a bet, and the following dialogue ensues:
    Smithers: "What are you going to do with your million dollars?"
    Burns: "I dunno…throw it on the pile, I suppose."

    Simply throwing money on the pile doesn't do a whole lot to stimulate the economy.
  • kurlos
    "Simply throwing money on the pile doesn't do a whole lot to stimulate the economy."

    It depends on whether the pile is kept in a bank, right?
  • lukas
    Only if the bank actually lends it out.
  • vikingvista
    They do lend it out--to the US Treasury.
  • That assuming the "textbooks" are 100% correct 100% of the time. How often is that the case?

    The problem with Krugman's use of the "textbook" defense is that he is appealing to himself as an authority.
    I can say a lot of things that are 100% true if you only can reference me, but that doesn't make it a fact.
  • David
    Sure, unemployed people have to spend money just like everyone else. If I were unemployed, I would cut my spending to a bare minimum. I would assume that's what most sane people would do when unemployed. I don't see why it's more stimulative for me to spend $x from unemployment checks rather than $x from my savings. I'm sure you know that when I have money in the bank, it's not just sitting in a "pile", either. It's made available to other people as credit. Unless you think most people literally keep their savings in a pile, I don't see why you think unemployment benefits would be so stimulative. It's easy to make the case that they aren't stimulative because of the disincentive to work. What argument is there against helicopter drops that doesn't also apply to unemployment insurance?
  • ahbritton
    "I don't see why it's more stimulative for me to spend $x from unemployment checks rather than $x from my savings."

    I am not 100% sure but if you are referring to the unemployed person spending from savings, the problem is that they will not spend as much if it eats into their savings, and if the point is to increase demand encouraging people to spend is important.

    "I don't see why you think unemployment benefits would be so stimulative."

    In the same Krugman textbook it explains "compare the effects of an increase in unemployment benefits with a cut in taxes on profits distributed to shareholders as dividends. Consumer surveys suggest that the average unemployed worker will spend a higher share of any increase in his or her disposable income than would the average recipient of dividend income… If that's true, a dollar spent on unemployment benefits increases aggregate demand more than a dollar's worth of dividend cuts…"

    That is why he thinks it is more effective to spend the money on unemployment benefits.

    "It's made available to other people as credit."

    The problem, as I am sure you know considering your icon is Milton Friedman, the current problem is a collapse in the quantity of money and credit. Milton Friedman's remedy in this situation is to lower interest rates and basically throw money at the banks if necessary. The reason is in order to expand the money and credit supply. Friedman thought that doing this through monetary measures was more effective, doing the same thing through unemployment benefits would still have a similar effect though. I think it is odd that monetarists are perfectly willing to throw money at banks but get skeptical whenever someone wants to spend a relatively small amount of money on the unemployed. Even Milton Friedman thought that fiscal policies as this would have a similar effect, just that it was less efficient.
  • David
    You're advocate giving people more money than they need to live on in unemployment benefits (this must be the case if it's possible to spend less and yet still live as you imply). That's a pretty good deal, but at that point I don't see why it's much different than simply giving every $x no matter what their employment situation.

    The problem with people spending unemployment money is that the money is not coming from them producing anything. The longer and more endurable it is to sit around and do nothing while collecting unemployment benefits, the less "stimulated" the economy will be. You are simply shifting money around from one group of people to another, and skimming a large percentage off the top of it in the process.

    Friedman's ideal monetary expansion was via a helicopter drop. It's not possible to do that, however, so you have to distribute money through banking institutions (assuming a central bank, nationalized currency, etc.). Banks have more incentive to efficiently allocate money than do unemployment benefits, many of whom go to wealthy people who have large swings in income from year to year. A bank will make funding available to a person or business that is credit-worthy and can convince them that they will likely be able to pay back a loan. That's much more efficient allocation than simply handing someone a check if they can prove they don't have a job.
  • ahbritton
    @David

    "You're advocat[ing] giving people more money than they need to live on in unemployment benefits (this must be the case if it's possible to spend less and yet still live [on] as you imply)."

    People, for the most part, can always live on less money (especially bankers and the wealthy), up to a point. There are countries which test these limits, thankfully we are not one and I doubt anyone would aspire to be one. Countries that test the limits of what people can live on tend to stagnate and not prosper, whether this is correlation or causation is another question.

    "Friedman's ideal monetary expansion was via a helicopter drop. It's not possible to do that, however, so you have to distribute money through banking institutions (assuming a central bank, nationalized currency, etc.)."

    So because you can't give money to everyone equally, your only choice is to dump it on the already wealthy (although recently unsound) monetary institutions? Why is it so unfair, and un-helicopter-like, to give a little bit of that money to the recently unemployed? Why do you react SO strongly to the notion that not ALL of the money should go to shore up the banks' poor investments, pay their salaries, and lend some of it at higher than usual interest rate to businesses and individuals?

    What is your evidence that this is better than giving it to others?

    Even if you believe that these institutions act completely selflessly (I would be surprised to find an economist who does), even IF I grant you this, why are banks so much more deserving of the helicopter drop? If the ideal is to give everyone some money, why is the best alternative to give only the wealthiest segment of society ALL the money?

    "The problem with people spending unemployment money is that the money is not coming from them producing anything."

    GIVING money to banks does not produce anything either! Dropping money from a helicopter does not produce anything! This is a non-issue, printing money does NOT create goods and services whether you are Friedman or Krugman.

    Krugman, and Friedman's, point is that the collapse in money supply itself can cause unemployment and recession. Why does giving to rich banking institutions "stimulate" the economy and giving it to the recently unemployed does not? Even Friedman admitted they both did, he just thought it was more efficient to lower interest rates and give the banks money, he did NOT deny that giving the unemployed money would have the same effect (albeit maybe less efficiently).

    "The longer and more endurable it is to sit around and do nothing while collecting unemployment benefits, the less 'stimulated' the economy will be."

    Like I said before when I quoted Krugman "compare the effects of an increase in unemployment benefits with a cut in taxes on profits distributed to shareholders as dividends. Consumer surveys suggest that the average unemployed worker will spend a higher share of any increase in his or her disposable income than would the average recipient of dividend income… If that's true, a dollar spent on unemployment benefits increases aggregate demand more than a dollar's worth of dividend cuts…"

    That is actually Krugman's point. During normal conditions, such as many European countries over the years, unemployment insurance disincentives people trying to find jobs. In the current economy, however, that is outweighed by two realities.

    1)There not being enough jobs available. You can blame this on minimum wage if you want to, but that is another matter. There are only so many lawn mowing jobs, and many more people than usual willing to mow your lawn. If you can afford to have your lawn mowed three or four times a week, that's great, but many can't afford even one lawn mower.

    2) The stimulative effect of increasing the money stock (or increasing aggregate demand, depending on how you want to put it) buy putting money in peoples hands and increasing the velocity of money.

    During normal times when there is a relatively normal unemployment rate the disincentive balances the stimulative effect and encourages unemployment and inflation.

    "You are simply shifting money around from one group of people to another, and skimming a large percentage off the top of it in the process."

    Why is it NOT shifting money to give banks money? They just inherently deserve it more?

    "Banks have more incentive to efficiently allocate money than do unemployment benefits"

    How do you possibly measure this? If an unemployed person goes out to dinner at their favorite restaurant once more than they would have otherwise, how is it inefficient to help pay the salary of the cook, waiter and business owner? The only efficient use of money is in financial institutions? Seriously, how do you know this? Banks are more likely to shore up their balance sheet maybe, more likely to pay their executives more, and more likely to pay those assets out to institutions that they know will pay them back, is that the efficiency? Paying them for bordering on insolvency means they will allocate resources more efficiently? I would appreciate if you could explain that to me.

    "A bank will make funding available to a person or business that is credit-worthy and can convince them that they will likely be able to pay back a loan. That's much more efficient allocation than simply handing someone a check if they can prove they don't have a job."

    A minute ago you said it was best to drop the money from a helicopter. Now you say that the only alternative is to give the money to banks, because they will know what to do with it, essentially. Whatever you do don't just give it to people having trouble paying their bills and paying down their credit cards, right? All the stupid unemployed will do is spend it on goods and services, providing people with jobs like idiots.

    In a decentralized system isn't it best to give the money to a dispersed population who will make a thousand tiny decisions than a few who will most likely save some of it and use it for capital gains investments?

    Again, why is it so bad to help out the recently unemployed (remember he is just talking about briefly extending unemployment benefits for a few months) and put money into the economy? And why is it so much better to just give it to banks?
  • David
    You are confusing, perhaps intentionally, normal monetary expansion with bank bailouts, which were not something Friedman supported. He did support institutions like the FDIC, but I don't see advocacy of TARP-like programs anywhere in his work. I am certainly not advocating bank bailouts, so I'm not sure where you're getting that from. I think recent Fed (and Congressional) policy has been terrible.

    I don't know why you're so hung up on whether or not an individual spends his or her money. Once the money is there, it's there. It's going to be used for some purpose unless people just enjoy holding it their hands or keeping it in their houses to look at.

    And let me reiterate that I do not advocate giving money to banks that are in trouble and going out of business. That is the bank's problem. I also realize that our monetary system is centralized and monopolized by the Fed, so any policy is going to be centralized. I didn't advocate only giving money to banks. If you'd read what I've said, you'd notice that I said you could also simply disperse money to the population through things like "tax rebates". I have no love for banks in particular, but I do believe that they can allocate money more efficiently than the government can when they are under market pressure. That is something that the government has taken away recently. It's not a bank problem. It's a government problem.
  • ahbritton
    David,

    "You are confusing, perhaps intentionally"

    I hope you are not implying I am trying to be deceitful in some way. We can have reasonable disagreements I hope without accusing each other of being deceitful. I pride myself on trying to present my ideas in clear and precise language and after looking over what I wrote I feel I accomplished that, if there is something in particular that was confusing it would be greatly appreciated if you could inform me of what so I can learn to avoid it in the future.

    "He did support institutions like the FDIC, but I don't see advocacy of TARP-like programs anywhere in his work."

    I would like to point out I never said anything about supporting TARP and unfortunately we will never know for sure what Friedman would have thought or done in the recent crisis.

    I honestly think it would have caught him off guard, shortly before his death I have heard interviews in which he states that huge catastrophes like the Great Depression have basically been solved (hopefully he is right) and that he was more worried by slow creeping inflation and not a severe downturn. He also praised the actions of the Federal Reserve in 2006, less than a year before the housing bubble began to deflate, for the wonderful record they had in recent history and continued to have.

    He not only supported the FDIC (which takes over banks and bailouts depositors), he said it was “the most important structural change in our monetary institutions since at least 1914.” As far as a TARP-like program it is hard to say, there are many ways to give banks that money, however, which almost certainly saves at least some banks from bankruptcy.

    Friedman did say that the FDIC "has succeeded in achieving what had been a major objective of banking reform for at least a century, namely, the prevention of banking panics. . . . [B]anking panics have occurred only during severe contractions and have greatly intensified such contractions, if indeed they have not been the primary factor converting what would otherwise have been mild contractions into severe ones. That is why we regard federal deposit insurance as so important a change in our banking structure and as contributing so greatly to monetary stability––in practice far more than the establishment of the Federal Reserve System"

    So he considered banking panics (typified by runs and mass bank closings) with the primary cause of the Great Depression and other major contractions. Elsewhere (although he preferred to stem the crises with aggressive monetary policy) indicated that the most important thing was to keep banking and financial institutions running and lending at whatever cost.

    Other's have also pointed out that Friedman and Schwartz pointed to Lombard Street in their monetary history as something that could have been avoided. That crises was caused by circumstances that had some similarities as today. It involved the collapse of "Overend, Gurney & Company," known as the "banker's bank." It became involved in excessive leveraging and illiquid assets. It's collapse triggered a severe contraction and Friedman and Schwartz speak favorably of stemming such collapses and contractions.

    There have been quite a few respected libertarians who think he would have supported TARP (I honestly only learned of them independently of my own analysis), including Tyler Cowen (economic chair at the libertarian leaning George Mason university), Bruce Bartlett (Former senior fellow at the Heritage Foundation), Megan McArdle (business and economics editor at the atlantic), as well as the (I am assuming) less persuasive Ben Bernanke, and Paul Krugman. Although there are those who debate that as well… but it is definitely not an entirely bizarre view.

    As Bruce Bartlett, economic historian and former senior fellow at the Heritage Institute said, "There's no way the Fed could have expanded the money supply in the early 1930s without bailing out the banks. How do you think the money supply declined in the first place? It's because banks failed and their deposits disappeared. To keep those deposits from disappearing in an era before deposit insurance would have required keeping bankrupt banks afloat."

    That is why Friedman was so supportive of FDIC. It allowed banks to insure that even if they weren't bailed out, their depositors and their deposits were, and could help usher along an orderly bankruptcy. I don't know if you remember the debate during the "too big to fail" period. People who wanted an orderly FDIC-style bankruptcy were called socialists, and it was said they wanted to "take over" banks. I, at the time, favored restructuring, although I do understand that there were certain logistical difficulties with trying to unwind such massive organizations. Also there is no FDIC for the shadow banking industries like AIG.

    Milton Friedman also thought that the FDIC would prevent the types of panics and mass bank closings that could possibly have returned, and in a limited extent did, in the recent recession.

    "I am certainly not advocating bank bailouts, so I'm not sure where you're getting that from. I think recent Fed (and Congressional) policy has been terrible."

    I am sorry if I made any assumptions, I just thought that since Friedman was your profile icon that you were very sympathetic to his monetarist ideas.

    If you are at all sympathetic to the monetarist viewpoint you have to at least admit that money has to enter the economy somehow, meaning someone in the economy has to receive it. My central point being that if the government is already giving out money, why not give some to the recently unemployed? After all it is a temporary measure for people who were recently productive members of society and according to their employers were laid off by no fault of their own and who's former employers have recently paid into the benefits system (granted not enough for the extension), and I would argue it would be more helicopter-like than giving it to just banks and businesses that higher new workers (the administration have give them tax credits as well).

    Like I said before, you are giving people money for not working whether they are employed or not. Tax cuts are a poor way to accomplish this, they are slow to enter the economy, you only receive your refund or decrease in payment once a year. They also apply to everyone evenly, even people who most likely will not spend it as quickly, which is important because EVERY recession has been accompanied by a drop in the velocity of money (the rate at which dollars exchange hands) and obviously the only way to increase the velocity of money is for people to spend it. That is why Krugman emphasizes people spending money, unless you have a better explanation for why EVERY recession also has a decrease in money velocity.

    This seems especially true in a situation where According to the Bureau of Labor Statistics, last July there were 14.5 million people looking for work, and 2.4 million job openings. That means that if EVERY job opening was filled (meaning absolutely no more openings) there would still be 12.1 million people looking for work without any job prospects. Also remember that we are only talking about a TEMPORARY extension of unemployment benefits by 13 WEEKS in high unemployment areas. So let's say that 1 out of 2 people who receive unemployment insurance decided they were just going to sit around and not do anything for those 13 weeks (I honestly think the number would be much less), that would still mean that there were 4.8 million people without ANY job prospects.

    In THIS SITUATION Krugman says that it is better to get money into the economy than worry about making a few people, who were probably already lazy, lazier. Most people I have known on unemployment (granted not many) desperately want a job because it is a much more difficult lifestyle than having a job and disposable income not to mention it doesn't last forever and they eventually have to find a job one way or another. There are those that are happy paying their rent and getting by, but they too eventually have to find some income and probably receive less from unemployment anyway. I don't know if this is true in all states but in California your unemployment is based on a percentage (Off the top of my head I believe 50%) of your salary prior to being laid off.

    So the people receiving the most unemployment are those who are probably the most naturally motivated, at least if you think their prior income is any indication. The most lazy almost definitely didn't have the highest paying jobs on average I would hope. Either way most, it seems to me, want something more for themselves and think of things such as the future and their prospects and trying to make a good life for themselves. Maybe I am idealistic thinking people are somewhat more rational than you seem to think they are. I think it is unfair to characterize these people as some kind of deadbeats as well. Deadbeats do not receive unemployment insurance because they have not worked for 6 months straight in recent history and gotten laid off instead of fired, only people who have made a lot of money for at least 6 months receive a lot of unemployment benefits.

    "I don't know why you're so hung up on whether or not an individual spends his or her money. Once the money is there, it's there. It's going to be used for some purpose unless people just enjoy holding it their hands or keeping it in their houses to look at."

    That is the problem people ARE just holding onto money. What are investments like gold or other low interest inert purchases anyway? While gold has been incredibly profitable, it is not much different than a mattress. It creates wealth for those who buy it, but it is only an investment in the limited sense. It is more accurately a store of value. It is not lent out to other people in order to increase production. Similarly buying government paper at zero interest is just a way for people to AVOID investing in anything, because there is more money available to lend than sound investments. If people COULD make money investing it they would, instead they put it in the government "mattress."

    "And let me reiterate that I do not advocate giving money to banks that are in trouble and going out of business."

    That is opposed to what Friedman believed. Maybe you should change your profile icon. Part of pumping money into the economy through banks is to keep them solvent, lending, and avoid panics. Granted the FDIC has eliminated all of that, except for recently with the big banks.

    "That is the bank's problem." Yes, one bank here and there isn't a big deal, but if several hundred banks go out of business it not only contracts the supply of money and credit but makes it harder to put more money and credit into the economy, even more so if it is a large bank.

    "If you'd read what I've said, you'd notice that I said you could also simply disperse money to the population through things like 'tax rebates'." I think I partly addressed earlier why rebates are slow and ineffective.

    "I have no love for banks in particular, but I do believe that they can allocate money more efficiently than the government can when they are under market pressure."

    Why aren't the recently unemployed under pressure to allocate money efficiently? Are they not purchasing goods and services in an open market economy? Why is patronizing small businesses less and not more important than lending them funds? Banks lending to businesses allows them to temporarily pay staff (not that lending to cover payroll is a good idea) but eventually businesses need activity.

    "That is something that the government has taken away recently. It's not a bank problem. It's a government problem." I think you definitely should change you icon because although Friedman was generally in favor of as little government intervention as possible, part of what makes monetarists monetarists is their belief in the nature of government intervention in contractions. They believe that the government needs to act quickly and aggressively to stem a severe downturn. You are right that in a stable economy they want to be relatively hands of, but they also think that contractions and bank failures are a major government concern.

    I hope that was clear, readable, and thorough. If not I would appreciate you pointing out where I was unclear so I can try to rectify that in the future, or clear up any confusion you have. I know my response is long. I try to be as concise as possible but I happen to also think that the U.S., and world, economy is complicated. I don't buy that you can just use simple ideas and ignore the facts and come up with something approximating the truth.

    A helpful suggestion I have received for presenting my case I think could also help you. It is helpful, and in some cases vitally important, to back up your case with facts, references and information. Anyone can make a series of assertions and deny an opponents arguments, it takes much more skill and understanding to be able to do so with facts, figures and references. I myself forget that on occasion, and personally find it not only helps with my arguments but reminds me of facts and ideas I have forgotten, as well as expose me to ideas I have never seen or missed.
  • David
    I am sympathetic to Friedman's monetarist ideas, though I don't know why that should make me favor bailouts over FDIC action. I'm also unaware of that position being called "socialist", and it would be hard for me to take that position seriously. I have been called a statist before, but that's usually by anarchists, so it all depends on the source of the criticism.

    If the options you're giving me are between bailing out banks and unemployment insurance, I'll take unemployment insurance. However, that deflects the discussion away from the point I was making, that I don't believe unemployment insurance to be any more stimulative than dropping money on people, and in most if not all cases, I believe it to be less stimulative or even harmful to the economy due to the disincentive to work that it creates. I don't have a problem with unemployment insurance, myself. I think it's a good idea, though I'm not sure that we need the government to run it. That said, my arguments here have been against describing it as stimulative. That is the whole point of this post, and where I have tried to keep my focus.

    Tax cuts aren't necessarily slow to enter the economy, if you choose to work through them. Withholding can be adjusted (and recently was, in April 2009 as part of the stimulus) very quickly.

    I never called anyone a deadbeat, or implied that anyone was a deadbeat. I think it's perfectly rational to not work when you don't have to work. It seems irrational to me to work when you don't have to work, unless you would rather work than not, all else being equal.

    I don't know why you don't like people buying gold. They have taken money that they were holding on to and bought gold with it! This circulates money, and is especially stimulative if you believe they are paying inflated prices for it. Think of it as a transfer of wealth from people who have nothing better to do than buy gold to people who produce and/or sell gold. I don't buy my groceries with gold. I buy my groceries with dollars. If I've just exchanged my dollars for a useless piece of metal, have I not just increased the amount of money in circulation?

    I do not believe that allowing banks to fail is against what Friedman believed. He believed in ensuring faith in the system, which the FDIC accomplishes. You don't need to protect the banks to accomplish this, and I don't think Friedman ever advocated that. I've read and heard a lot of his stuff and cannot think of an instance where he promoted any sort of bailout for banks.

    Businesses will not ask for loans if they are not expanding. It's pretty simple. That's why banks making loans are an efficient method of distributing money into an economy. Banks that can fail have an interest in the success of their loans.
  • Wondering
    Don,

    Your letters are all marvelous, and the world would be better off if you replaced Krugman as a NYT columnist. But do these letters you write ever get printed, or is this therapy?
  • vikingvista
    The world would be better off if nobody paid attention to the NYT. And by that measure, it would seem the world is getting better.
  • The market has a habit of correcting itself, look at the NYT readership numbers compared to WSJ. it won't be too long before the market pays back the NYT for all their statist rhetoric, if only Obama would allow the market to work that is.
  • vikingvista
    The market will pay them back, then the looting statists will pay the NYT with the funds of those in the market.
  • lol. I wonder what/if he'll respond.
  • No DeLong does his dirty work. Expect Don to take over as the "worlds worst economist."

    Russ will be devastated.
  • I'm not so much in the business of defending Paul Krugman, since I don't like the fact that a lot of people take what he says as the objective truth because he's a prominent economist when in reality what he is pushing is his own ideology, often with little empirical support.

    That said, in this particular instance he is specifically talking about a scenario where there are 5 job seekers for every open job. Therefore, in a short-term sense at least, the unemployment benefits would have to make more than 80% of unemployed people too lazy to find a job in order to have an effect on unemployment. (I am oversimplifying a bit because I didn't account for the matching in qualifications of workers to jobs, but hopefully you see my point.) The incentive effects of unemployment insurance are much more of a concern when the ratio of unemployed workers to available jobs is lower.

    In a longer-term sense, however, it becomes clear that the lack of concern over disincentives to work could prove to be problematic, and I think that this, if anywhere, is where Krugman contradicts himself a bit. The mechanism that he describes goes something like this: Unemployed people get unemployment checks and they spend them on stuff that they need. This serves to stimulate the economy and create jobs, which should get people off of unemployment. The funny part is that if this plan works really well, it will create enough jobs to drive the ratio of unemployed people to open jobs way down, and we could end up in with a situation where there aren't people to fill the newly created jobs because they're on the couch eating Cheetos purchased with their unemployment checks.

    I am not in principle against the idea of unemployment insurance, since I do feel that, if done right, the benefits outweigh the costs. But I would like to see a more nuanced policy where benefits are explicitly countercyclical and/or move in line with the ratio of unemployed people to available jobs. In other words, it makes sense to insure people against too many workers and not enough jobs but not insure them against their desire to sit on the couch.
  • sethstorm
    The problem is that some of that unemployment is politically motivated, such as with offshoring.

    On top of that, you're expecting people to go against what is economically rational just so they have work.
  • RickRussellTX
    "That said, in this particular instance he is specifically talking about a scenario where there are 5 job seekers for every open job. Therefore, in a short-term sense at least, the unemployment benefits would have to make more than 80% of unemployed people too lazy to find a job in order to have an effect on unemployment. "

    With respect, I believe you are incorrect. Unemployment doesn't have to make people lazy, it just has to pay enough money that folks are unwilling to seek lower-wage employment.

    This is the sticky wages problem in a nutshell; a laid-off middle manager who was making $75K is unlikely to turn around and bag groceries or sweep up movie theaters for $25K when unemployment is paying more. Heck, read their stories:

    http://www.huffingtonpost.com/2010/02/24/americ...

    If these folks had nothing coming in, you can bet they would be hitting the bricks looking for anything they could find, not sitting at home cruising the Internet and sending out resumes. And employers would have more funds available for hiring, which makes it practical to hire folks to bag groceries or sweep up. In a very real sense, every dollar that goes into unemployment benefits is a dollar taken out of payroll.

    And, as a matter of principle, how does it help the economy to pay people not to work? That can't possibly lead to greater overall wealth, not for the individuals and not for the economy.

    I'm all for a short-term safety net to get people from job to job, and with our health care system as clusterf***ed as it is, COBRA is probably a necessity. But there's a point at which it becomes like the execrable union job banks, nothing but a drain on financial resources that could be used to produce something.
  • ahbritton
    "it just has to pay enough money that folks are unwilling to seek lower-wage employment."

    Krugman says that this become much less relevant when there are 5 job seekers for every opening. How are these people suppose to find a job at a lower wage when there are not enough jobs to fill in the first place? On top of that there are plenty of stories of PHD educated professionals looking for rather remedial jobs. The funny thing is they rarely get the job because a business would rather have someone who has experience mopping floors mopping their floors than someone with a degree in engineering.

    On top of that many of the layoffs are towards the bottom of the pay scale. Their is only so little a business can legally pay someone. If you were being paid minimum wage before, how exactly do yo lower your wage?

    "If these folks had nothing coming in, you can bet they would be hitting the bricks looking for anything they could find, not sitting at home cruising the Internet and sending out resumes."

    Again, there are more people doing this than jobs for them to fill. It doesn't matter how many resumes you send if no one has a position for you to fill.

    "And employers would have more funds available for hiring, which makes it practical to hire folks to bag groceries or sweep up. In a very real sense, every dollar that goes into unemployment benefits is a dollar taken out of payroll."

    This actually IS NOT the case. The federal government has not been taking extra money out of payroll for possible employees. It is possible that local governments have raised taxes, but as of yet the federal government has not. So where do you suppose this extra money for workers is going to come from?

    On the other hand if people were shopping in their stores and buying their merchandise businesses WOULD have more money to spend on employment. Hence the benefit of Unemployment Insurance.

    "how does it help the economy to pay people not to work?"

    Because the goods and services they spend their money on help create jobs.

    "That can't possibly lead to greater overall wealth," many economists think it can, and you are free to disagree but I'm not sure you understand the underlying issues.
  • Ryan Vann
    I think you bring up valid points, and that leaves us to ponder whether we think the UE levels are significant, or potential employment opportunities large enough that we are seeing gross deadweight losses here. My guess is no on both accounts, and that the UE benefits issue is a political red herring. Some might have other opinions, and they might be the correct ones, but if we can't even agree that levels of benefits and state of the economy are essential in analyzing the incentive effects, we have a problem.
  • sethstorm
    The problem is that there simply is not enough work and not enough people willing to start a business. Some people are fine enough to want to work, but forming a business is against their morals and ethics (despite having no other problems at all with business).

    Never mind that if they can't find a job, why should they bother with forming a business? If the conditions that allowed them to work do not exist, why should they re-create the problem, except with more risk and little reward?

    The economically rational response for them is to wait things out as long as possible. Wage compression and forced (by a limited set of choices, which is as powerful as any gun) choices of economic irrationality are things that are fought.


    --
    It may be comfortable down there to sell your soul and sovereignty in Texas for the sake of business-friendliness. Whatever political ends that might allow, it always comes back to harm you.

    If anything, kill offshoring until unemployment figures such as U-6 (as measured now) are 2% or lower. Then bring it back in a way that favors US citizens as long as unemployment (or any similar programs thereof) rates are at that rate.
  • RickRussellTX
    > The problem is that there simply is not enough work

    I fail to see how paying people not to work corrects the problem of not enough work. Since that money is coming out of company payroll, it would seem to make the problem worse, not better.

    The only way to correct that problem is to make hiring cheaper, so businesses do more of it.

    > economically rational response for them is to wait things out

    But only as long as unemployment benefits exceed the wage they are likely to get in the open market. As soon as unemployment benefits drop, they'll be willing to take lower-pay jobs, or mow lawns, paint houses, work on a roofing crew, work a warehouse floor, move to a different city to find better opportunities, etc.

    Those are precisely the kinds of "holding positions" that we need until companies can re-trench and deploy new projects. Paying people to stay put and not work is the least effective way to heal the economy.

    Paying them to learn new skills is a little better, although it's difficult to know what skills will be in demand in the future.
  • ahbritton
    "As soon as unemployment benefits drop, they'll be willing to take lower-pay jobs, or mow lawns, paint houses, work on a roofing crew, work a warehouse floor, move to a different city to find better opportunities, etc."

    This is only true if there ARE lawn mowing, house painting, and roofing work available. Fewer people want any of these things during a recession and there are more people willing to do them. The guy who use to mow your lawn still wants the job but now there is a laid-off cashier who also wants the job, but there is only one job, in fact there is less than one job because many of the previous lawn mowing jobs have disappeared do to people not spending money on such things.


    "Paying people to stay put and not work is the least effective way to heal the economy."

    You are not paying people to stay put, you are paying them to spend money into the economy. Spending money helps create jobs, but people are saving which reduces jobs.
  • RickRussellTX
    @ahbritton, I'm well aware of the Keynesian idea that borrowing money and putting in to the economy (in this case, in the form of payments to idled workers) is one way to stave off the effects of recession, blah blah, the multiplier effect, etc.

    And I'm not asserting that it fails to stimulate the economy at all.

    But I think it's a fault in Keynesian reasoning to think that, of the universe of things somebody might do with $1, giving it to idle workers to spend on consumption is just about the same as every other possible option. I think that's a claim that needs to be demonstrated by net present value analysis, rather than asserted.

    All decisions have to be measured against the seen and unseen. If the government borrows $1, a rational decision making process must compare that decision to the universe of possible things it could have done with that $1 (with appropriate consideration of the time value of money), as well as the universe of decisions it could have made that did not involve borrowing the dollar or charging taxes to get the dollar.

    So, Krugman claims that paying the $1 to idled workers to do nothing is creating more employment than other possible uses of that dollar. The burden on him, and my assertion, is that he needs to consider the universe of other options for that $1. If one of those options results in more employment (or, I would suggest, a present value of future employment that is higher than the employment created by giving that $1 to idled workers), then indeed, spending $1 by giving it to idled workers has resulted in higher unemployment.

    Fundamentally, I believe Keynes understood this. Spending your stimulus $1 on workers to build dams and freeways was a way of turning stimulus dollars into present value of future benefit. Hayek would probably see it as malinvestment and assert that the market would be better off deciding where to put that dollar, and the proper thing might be to not remove it from the market in the first place.

    I think both positions are more principled than Krugman's claim that giving idled workers money to buy household goods is saving jobs.

    And I don't subscribe to the ridiculous claim that this money isn't coming from taxes. If the government borrows, that's money that eventually comes from taxes. All computations need to be done at the *present* value of money; that's the only way evaluate the costs of decision options right NOW, and make a decision that maximizes benefit and minimizes cost.

    Krugman claims that withholding the $1 from idled workers is "sheer cruelty" -- I would counter that doing anything with the $1 that doesn't maximally contribute to the net present value of the economy is sheer cruelty. It's Krugman's job to show that giving to idled workers is the decision that does provide maximum benefit to cost, and he fails utterly, instead falling back on the claim "unemployment benefits are a good, quick, administratively easy way to increase demand, which is what we really need." That's philosophical, and not based on an understanding of the present value of future activity.

    Productivity maximization is what will create jobs for idle workers, not "the administratively easy" solution.
  • ahbritton
    Thank you for your well reasoned and thoughtful response.

    In the textbook where Krugman supposedly contradicts himself, part of his answer can be found "compare the effects of an increase in unemployment benefits with a cut in taxes on profits distributed to shareholders as dividends. Consumer surveys suggest that the average unemployed worker will spend a higher share of any increase in his or her disposable income than would the average recipient of dividend income… If that's true, a dollar spent on unemployment benefits increases aggregate demand more than a dollar's worth of dividend cuts…"

    That is part of the reason, I gather, he thinks it is a cheap and effective way to introduce stimulus to the economy. Although I must admit I have only read small portions of the textbook.

    I do think it is interesting though that monetarist's ideas is so much more readily excepted. That when there is a recession and a collapse in the quantity of money and credit that there is nothing wrong with loaning money to banks for very little, or in fact just giving banks money. Yet if someone recommends putting a minute fraction of that into individuals pockets who are struggling as a method of increasing the stock of money, it suddenly is attacked as socialism and hurting America.

    It seems to me like a slight double standard, but I could be wrong. Although it is true that the money eventually needs to be paid back, I believe the idea is that once demand increases and unemployment decreases and we start to recover it will be easier to pay back than if we continue to flounder. If we are able to recover within a decent interval it could actually save us money because we will have increased the value of our economy through increase production and a stronger labor market allowing us more excess value to pay off debts.

    That is after all why people take out mortgages and get loans. You could make the same claim about someone taking out a loan for college. Why don't they just save that money? It's because they hope to borrow future wealth in the hopes of its transfer to the present being able to stimulate their job prospects eventually allowing them to create enough value that they can return the money and then some.

    No one wins, debt or no debt, if we stay in a deep recession. I do agree that we have to be careful, however. I personally think that we have already spent plenty of money that could have been better spent elsewhere. I think that is something on which we can both agree.
  • RickRussellTX
    Consumer surveys suggest that the average unemployed worker will spend a higher share of any increase in his or her disposable income than would the average recipient of dividend income

    Sure, and if payment into corporate dividends was the only possible use for $1 of stimulus, then I might agree that it would be less effective.

    But that overt simplification is wrong. Retained earnings are used for investment in new projects, they become down payments on loans for new projects, they improve the corporate balance sheet and *increase* job availability and security. Businesses will be willing to hire more if they anticipate that less money will be lost to taxes. Dividends are only one possible destination for the $1 that is not taken by the government.

    You can't in good faith say that $1 taken from one consumer and given to another consumer as payment to not work must implicitly provide more economic stimulus than that same $1 in the hands of an employed individual or in corporate retained earnings. When that $1 is paid to a company or to an employee, it will provide every bit as much stimulus, and perhaps much more, than $1 to someone who is not working.

    That's why everybody is wound up about Krugman and his politics. He's sacrificing economic sense for support of a welfare state, and his concern for "cruelty" to the unemployed has blinded him to the fact that continuing to borrow money to support economic stimulus will ultimately result in less productivity and fewer jobs.

    You could make the same claim about someone taking out a loan for college. Why don't they just save that money? It's because they hope to borrow future wealth in the hopes of its transfer to the present being able to stimulate their job prospects eventually allowing them to create enough value that they can return the money and then some.

    That's why I say that computations need to be done on present value of future operations. Compute the value of future income resulting from college education, and compare it to college tuition and the related costs.

    So, when we talk about borrowing $1 for economic stimulus, we need to calculate the cost of that loan, not simply look at the $1 at face value. The actual price of $1 (borrowed) of economic stimulus is higher than $1. All rational financial decisions must be made in light of the time value of money, inasmuch as it can be known.
  • ahbritton
    @RickRussellTX

    "Retained earnings are used for investment in new projects, they become down payments on loans for new projects, they improve the corporate balance sheet and *increase* job availability and security."

    This is only true if people are spending money. If people aren't spending money, what is there to invest in? If no one goes out to eat, why invest in restaurants?

    "Businesses will be willing to hire more if they anticipate that less money will be lost to taxes."

    Why do you say this? Recently tax credits have been offered for people hiring new workers. If they expect taxes will be raised down the line they will be more inclined to hire workers now, while there is a tax credit and taxes are low. In the US it is very cheap to fire workers (as long as they aren't part of the small fraction of workers in unions) as compared to other countries so they would have very little disincentive to hire now and fire later, if needed.

    "You can't in good faith say that $1 taken from one consumer and given to another consumer as payment to not work must implicitly provide more economic stimulus than that same $1 in the hands of an employed individual or in corporate retained earnings."

    That was the point of the quote I gave you from Krugman's textbook. You CAN say that because the unemployed are more likely to spend it and stimulate the economy, increasing the velocity of money.

    Again, no one's earnings have been taken in the US. IF you think that the supply of money and credit needs to be expanded, like monetarists, Keynesians, and some austrians, believe, than you HAVE TO GIVE MONEY TO SOMEONE. We have already given boatloads of money to banks and other financial institutions, why is it so harmful to give a tiny fraction to the unemployed so that they will spend it more quickly into the economy?

    "When that $1 is paid to a company or to an employee, it will provide every bit as much stimulus, and perhaps much more, than $1 to someone who is not working."

    Where is your evidence of that? Why would it provide more stimulus? You can say that all you want, that doesn't make it true. It depends whether they spend it into the economy and increase the velocity of money. The point Krugman is trying to make is that it is more important to increase demand because demand creates jobs. Who is going to hire you if no one is going to buy your goods? Why would you invest in a business if you have no consumers? And the unemployed are MORE LIKELY TO SPEND IT.

    "that's why everybody is wound up about Krugman and his politics. He's sacrificing economic sense for support of a welfare state, and his concern for 'cruelty' to the unemployed has blinded him to the fact that continuing to borrow money to support economic stimulus will ultimately result in less productivity and fewer jobs."

    How is this so? Krugman is perfectly willing to admit that unemployment benefits can be a problem. He just thinks that when there are more unemployed than jobs it is more beneficial to get money into the economy than to worry about small disincentives to work. MOST ECONOMISTS believe that the money supply NEEDS TO BE INCREASED in a recession such as this. Unless you disagree with that, money once again, has to enter the economy somewhere.

    According to the Bureau of Labor Statistics, last July there were 14.5 million people looking for work, and 2.4 million job openings. That means that if EVERY job opening was filled (meaning absolutely no more openings) there would still be 12.1 million people looking for work without any job prospects. Remember we are only talking about a TEMPORARY extension of unemployment benefits by 13 WEEKS in high unemployment areas. So let's say that 1 out of 2 people who receive unemployment insurance decided they were just going to sit around and not do anything for those 13 weeks (I honestly think the number would be much less), that would still mean that there were 4.8 million people without ANY job prospects. In THIS SITUATION Krugman says that it is better to get money into the economy than worry about making a few people lazy. It is NOT crazy, socialistic, or against economic reasoning and I'm not sure why you continue to think it is, maybe you could show me the problem with my numbers and reasoning.

    "He's sacrificing economic sense for support of a welfare state, and his concern for 'cruelty' to the unemployed has blinded him to the fact that continuing to borrow money to support economic stimulus will ultimately result in less productivity and fewer jobs."

    Mainstream economists almost all recommended putting more money into the economy, that is why interest rates were lowered so much, there were injections of liquidity into financial institutions, etc. This is not a controversial idea. In fact it is a libertarian REPUBLICAN economist who popularized the realization that the health of the economy is directly related to the growth of the money supply. During the great depression their biggest mistake was allowing money and credit to collapse. To avoid that you can just print money.
  • RickRussellTX
    This is only true if people are spending money. If people aren't spending money, what is there to invest in?

    This strikes me as a backward view that ignores 70 years of studying the Great Depression.

    Of course people -- and businesses -- are spending money. That they are not spending money to support industries whose products are in low demand (say, houses) simply means that consumer desires and preferences are in transition. That's when inefficient market players are pruned out.

    That we should pay people to not work for an extended period is a "stimulus" every bit as ruinous as paying dairymen to pour milk into ditches, paying farmers to burn their crops or paying a vandal to break all the windows so the window-glazier will "spend into the economy". The policy was a disaster in the 1930s and left us with a legacy of ridiculous, execrable and unnecessary agricultural subsidies.

    The only way to prune inefficient industries is for them to fail, and for the people who worked for them to find something new, not sit at home hoping that doing the same thing over and over again will have different results.

    There are plenty of ways to invest money and build. Intel broke new ground on US-based chip fabrication facilities in 2009. Honda is hiring at their new small jet aircraft plant in South Carolina.

    You seem to think that giving money to keep consumers unemployed is a quick fix to create jobs -- that spending in the consumer channel will create *more jobs than other uses of that money*. That is an assertion that demands proof.

    That was the point of the quote I gave you from Krugman's textbook. You CAN say that because the unemployed are more likely to spend it and stimulate the economy, increasing the velocity of money.

    No, you CAN'T say it because paying into corporate dividends is a strawman designed to make the alternative, paying it to the unemployed for turnaround into consumption, seem like more effective choice.

    Sure, dividend-receivers may spend less into the economy in a recession. But Krugman didn't consider the case of payroll employees, or businesses starting new projects in new industries, or investing the money by purchasing foreign capital, or making capital available for foreign investors to employ people here, or the reinvestment of dividend payments into new IPOs or corporate bonds, or... the THOUSANDS of potential choices that Krugman willfully ignored when he set up the argument.

    Krugman can't approach the problem rationally because he knows he can't even elucidate the many ways in which creative people might use their $1 to build wealth, much less determine which one is best. So he sets up the strawman and knocks it down.

    It's a fall back on the Keynsian-inspired argument that any way of getting money into the economy is just about the same ("public works, diggin' ditches, war has the effect"), so we might as well make deliberate malinvestments and support inefficient industries because that's as good a choice as any other.

    Myself, I'm feebleminded. Unlike Krugman, I don't claim to know that spending on consumer goods and services is the path to maximum growth or maximum employment. I don't know that borrowing money to give to unemployed consumers is effective. I prefer not to make that claim, and instead rely on many individuals to select among many options, and take advantage of the fact that, on balance, there are creative individuals who will make good decisions that result in high net present value.

    I'll grant that unemployment benefits are far from the *worst* way to spend money -- at least they rely on the wisdom of the crowd of unemployed to spend into things with high utility (to them), and some of that will make it into businesses that break ground on innovative activities with high net present value. But I contend that the better solution would be to not take the money away from the businesses that are investing in high net present value in the first place, regardless of whether they are involved in providing goods and services to unemployed people.

    According to the Bureau of Labor Statistics, last July there were 14.5 million people looking for work, and 2.4 million job openings.

    If the simple goal is job expansion(*), then the onus is on the people taxing or borrowing the money is to demonstrate that this use of the money -- giving it to the unemployed -- is the *best* method to create new job openings. I see no evidence that this has occurred. It is, as Krugman said, the "administratively easy" solution.

    Let's think about the fallacy that all methods of taking money from somebody and putting it back into the economy are essentially the same:

    IF you think that the supply of money and credit needs to be expanded, like monetarists, Keynesians, and some austrians, believe, than you HAVE TO GIVE MONEY TO SOMEONE.
    ...
    Unless you disagree with that, money once again, has to enter the economy somewhere.

    So, someone & somewhere might as well be the people who you prefer? Why make that choice at all? Don't pick and choose, let the economy decide where the money goes based on ROI and net present value. Those are the activities that result in highest growth(*).

    (*) I admit they may not result in the highest overall employment, but Krugman and others have hardly demonstrated that this is the best way to create jobs either. So, in the absence of being able to measure job creation directly, I'll take growth and let job creation follow. The link between the two is consistent.

    We have already given boatloads of money to banks and other financial institutions, why is it so harmful to give a tiny fraction to the unemployed so that they will spend it more quickly into the economy?

    So, if we've borrowed and malinvested so much already, we should borrow and malinvest more? I guess, in the Keynsian mindset, it's all about the same, so why not? Paying good money for no work certainly fits the bill. Money has to enter the economy somewhere.

    I suspect that, when the sad tale of the real estate bubble is finally told, we're going to find that everybody would have been a lot better off if banks had been forced to make a frank and realistic assessment of the value of their assets, then written off the losses and gone into bankruptcy receivership. Just as farms in the 1930s should have done the same thing, but were instead propped up -- leading to nearly a century of persistent complaints about the imminent failure of US farming.

    Then the good banks -- minimally exposed to these risks through realistic risk assessments -- would have come out ahead, and the people who arranged this disaster would be rightly branded as failures. Instead, we've put the government's thumb on the scale again, and allowed inefficient insitutions to prosper at the expense of all.

    Mainstream economists almost all recommended putting more money into the economy, that is why interest rates were lowered so much, there were injections of liquidity into financial institutions, etc. This is not a controversial idea.

    The best way to put money into the economy is to let people borrow it at reasonable interest rates, so they have to find high value activities to make the borrowing worthwhile.

    To avoid that you can just print money.

    You might consider a move to Zimbabwe.
  • Gil
    Did Don Boudreaux argue that there's alway work to be done. The problem is a combination of the cost of labour isn't allowed to fall to its natural level as well as employment laws and business startup regulations.
  • LowcountryJoe
    Then Krugman really should have written with more clarity and provided more detail about why, this time, it makes a difference. When he doesn't do this, he opens himself up to the criticism of his past writings/statements. He deserves the criticism and should address it head-on in his next column. The criticism won't go away either even if he's got apologists around the web who hold his (Krugman's) critics to higher standards than they do him.
  • ahbritton
    I agree, and he actually did respond to his critics on his blog titled:

    "Supply, Demand, and Unemployment"

    Anyone confused with his editorial should check it out. It involves some technical issues such as NAIRU, but looking into it should hopefully be somewhat informative.
  • David Walsh
    Thank you, danielkuehn, for clearing the air on that. It instills in me something very close to fear, to think that if you hadn't posted the entirety of the quote that this article relies upon, Krugman probably would have simply lost some points with me and that would have been that. And it's only a matter of time, too, before your comment gets bumped and the article's misconstruction goes once again unchecked to the casual reader (and isn't almost everyone a casual reader?).

    I don't suppose Mr. Boudreaux would take the time to properly address this horrifying error of his himself.
  • There's only one real solution high unemployment; the reduction of government impediments to employment.
  • vikingvista
    "Structural unemployment" is a creation of the state.
  • muirgeo
    The context for "bizarre" is that Kyle puts the needs of the estate tax effecting a tiny minority with unimaginable wealth and in no dire straights priority over families with children who may lose their houses , their health insurance and more. Not to mention the economic arguments of which is of greater importance. Does he really think the economic recovery is more likely to be positively effected by allowing the privileged classes to pack away more money versus recirculating that same money in the form of it ALL being spent by the desperate recipients of unemployment insurance?

    Its bizarre to an incredible degree both morally and economically. But again like Krugman I don't live in that universe.


    "Consider, in particular, the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year. Republicans will block that bill, said Mr. Kyl, unless they get a “path forward fairly soon” on the estate tax."
  • Randy
    Hey doctor, why do you charge for health services when so many can't afford it. If the people you target in your comment aren't entitled to property rights in what they create, then neither are you.

    As for the privileged (the political class), I agree with you. They should be taxed at the 100% rate, because they didn't earn it.
  • brotio
    Our dear Ducktor believes that charity begins - at gunpoint.
  • muirgeo
    No charity exactly doesn't require a gunpoint. Living in a civilized society DOES require obligations. The democratically agreed on rules of civil society indeed need enforcement as feckless whining government tax hating bastards will dial 911 when their hide is at risk just as fast as the reasonable and pragmatist among us.
  • Randy
    Obligations to who? I think I have an obligation to treat my neighbors with respect, that I have an obligation to deal with them fairly, and that they have precisely the same obligation to me. Nowhere in that formulation do I find room for the assertion that I owe a debt to any political class.
  • LowcountryJoe
    Where's your charitable contribution outside of the normal tax scheme?
  • muirgeo
    Relying on charity to solve the problems just gives the non-charitable vultures a leg up. No... they need to pay as much as anyone. The charity is that these jack asses are allowed to live peaceably behind their gated communities while real Americans keep them safe and make their bread.
  • LowcountryJoe
    So, you're [notice the correct usage of the contracted word, Doctor] a bully in addition to being a thief?
  • brotio
    Also note that he didn't answer your question. Surprise! Surprise!
  • ben22
    At some point the phrase 'outright fraud' comes to mind, and here Krugman crosses that line. He is a poster child for the sacrifice of reason for partisanship. What a sad person he must be, presumably so angry at Republicans he will now contradict himself as and when it suits. It's just incredibly sad watching such a smart person be so completely disowned and laughed at by his peers.
  • drtaxsacto
    The substance of Don's quote is correct in both places. Krugman taints the truth to advance partisan points.
  • Moggio
  • yreg
    Any letters sent in support of the 0,25% of households who might want to save more than 7 million dollar estate-tax-free ?
  • Peter Beardsley
    It really doesn't matter what school of economics you come from; they all agree on the basic notion of "Subsidize it and you will get more of it; tax it and you will get less of it." Regardless of their intentions, unemployment benefits are subsidizing unemployment, which leads to more of it than would occur naturally.
  • vikingvista
    "they all agree"

    Keynesianism is rooted in a rejection of basic supply and demand principles. Economics is an explanation of them. Keynesianism is not economics.
  • danielkuehn
    Could you explain what you mean when you say Keynesianism is rooted in a rejection of basic supply and demand principles? That's news to me. Where/when does he or any Keynesian reject that? Or did you just think that sounded like a good swipe to take?
  • vikingvista
    "Or did you just think that sounded like a good swipe to take?"

    It's both.
  • danielkuehn
    OK - if it's both then what did you mean that they reject basic supply and demand principles? That seems to me to be blatantly false, and not even a criticism that detractors of Keynesianism ever claim, much less anyone else that knows anything about it.
  • vikingvista
    I suspect the good professors are none too fond of these long posts, but you ask an irresistible question, so...


    Right from Keynes' origins there is the denial of basic S&D dynamics in the loanable funds market--the presumption that increasing the supply of savings leads to...an equivalent decline in the supply of savings (paradox of thrift). This ignores entirely the expected effect on the demand curve--investment (Keynes did not propose investment was inelastic to interest rates). This leading to the odd notion that a business's number one priority when faced with declining revenue is...to replace that income stream by drawing from savings (or to cut consumption from suppliers who will then prefer to make it up by drawing from savings). And that is equivalent to the strange economic assumption that the causes of economic growth, including rational self-interest or increased efficiencies, the elements of restructuring economy, essentially don't exist.

    Then there is the fetish for sticky prices, including sticky wages. Far from being a simple lag phenomenon, it is supposedly perpetuated in a free market, only relieved by government intervention. And of course, the assumption that the market trajectory is directed toward some steady state other than S&D analysis predicts, is a suspension of basic S&D theory. The irony, is that many keynesian policy-makers (like FDR & Nixon) advocate coercive policies to deliberately make prices stickier--attempting to create for themselves a self-fullfilling prophecy.

    Then there is the attempt to abstract away the underlying assumptions of S&D analysis by aggregating ABSOLUTELY ALL MARKETS. The assumption being that there is no difference between Bob & I not wanting any more of your eggs, versus the completely different scenario of Bob & I not wanting your eggs, plus you & Bob not wanting my milk, plus you & I not wanting Bob's bacon. The ramifications of wiping away the heterogeneity of markets is to allow keynesiac policy activists to force Bob & I to keep buying your eggs, rather than to allow you to get into the bacon & milk, or maybe wool, business.

    Then there are the policy diagnoses and prescriptions by keynes's followers. These involve in particular the effects of massive subsidies. S&D predicts rising prices as the equilibrium quantity increases. And yet somehow not only is their diagnosis not what S&D predicts, but the prescription is even more subsidies. The most glaring examples are in health care and higher education.

    And how many keynesiacs are activists for perpetually increasing income tax progressivity, while simultaneously disparaging pre-tax income differences? But of course S&D predicts that increased progressivity will PRODUCE increased pre-tax income differences.

    S&D follows from an understanding of the collective effects human economic behavior--microeconomics. Keynesianism can be conceived only as a violation of those principles. Despite efforts to try, there can be no reconciling of keynesiac macro- with microeconomics. Keynesianism therefore, is NOT economics.
  • danielkuehn
    First paragraph - you're committing a fallacy of composition by assuming that the paradox of thrift suspends S&D. The whole point is that output is dictated by S&D too, and under paradox of thrift, output declines dragging total savings down. Micro-level loanable funds market still operates under standard S&D in a paradox of thrift, so does AS&AD, and they both work together to produce the so called "paradox". This is why you need macro - because the joint operation of supply and demand across several markets can have these sorts of dynamic results. I don't see where S&D is suspended here - it's basic S&D that GIVES US the paradox of thrift.

    Sticky wages are an empirical question - either they are sticky or they aren't. Keynesians never assume to my knowledge that prices have to be sticky - just that they can be. Again, this is basic S&D - that market adjustments happen in time and space. How quickly they happen is an institutional, psychological, and empirical question - there's nothing about sticky prices that violates S&D.

    Your aggregate demand paragraph is completely incomprehensible. What Keynesian tells a person he has to buy a certain thing? AD and AS are used because variables of interest - employment, money, and the price level specifically - respond to aggregates. Aside from that, it's a hueristic device to illustrate what in 1936 was a very new and hard to grasp theory (and still hard to grasp for many people). Read Keynes's chapter on interest rates (I believe it's 13 or 14). He specifically talks about how there are all sorts of different products that are all different and need to be considered, but he would consider one homogenous product for purposes of illustration. Keynesians are aware that the market is more than just one big aggregate. It doesn't make aggregates any less useful for discussing these phenomenon. And it can help to keep people from committing a fallacy of composition - as you have with the paradox of thrift. Life was more complicated than Newton depicted it too. Do you advocate just rejecting Newtonian physics? No - it has it's uses and others have built on it.

    I don't know what you're refering to with your subsidies paragraph. Obviously people advocate subsidies, I'm not sure what it's relation is to Keynesian economics.

    Same with your tax issue, although I suppose I can see the connection more on that one. How does increased progressivity produce inequality? You're starting to sound like dg lesvic now.

    Is this all you meant when you said they reject supply and demand? You need to open your eyes, vikingvista. I have a lot of reservations about Austrian economics, but I don't just invent criticisms of them that don't make sense.
  • Gil
    There was a news segment from the U.S. showing wages aren't sticky at all - people have been quick to take jobs that pay a fraction of their former jobs or were indeed willing to take a pay cut if it meant keeping their existing jobs. As long as unemployment means 'no money coming in' then people do indeed adjust fast.
  • danielkuehn
    Interesting. You always have to wonder about news reports on that sort of thing, but that would be an interesting development. When interest rates and inflation are high, everyone is pretty much in agreement that nominal wage cuts will help get employment back on track. When interest rates and inflation are low, it's much less clear. It's often suggested that Keynes said that nominal wage cuts won't work - actually if you read Chapter 19 of the General Theory he lists no less than seven impacts that a nominal wage cut will have - some of which will improve employment, some of which will make the recession worse. He comes out somewhat skeptical that nominal wage cuts will work, but basically agnostic. It's not something we know much about conclusively - empirically or theoretically.
  • Marcel
    Don, Krugman is talking about the more specific issue of temporarily (emphasis here) increasing unemployed benefits during a deep recession. This has nothing to do with the structural unemployment of Europe.

    Since there are many more workers willing to take up at job than currently available job openings, it is indeed problematic to think that the disincentive effect of this initiative (even if it is large) will make any difference to the unemployment rate. The number of people trying hard to find something will still exceed the creation of new jobs.
  • Bill Stepp
    Unemployment "insurance" is not insurance; it's just employer (and also employee) paid welfare for dead beats. If you subsisize anything, including unemployment, you end up with more of it, not less.
    Here's wishing Wells would go back to the People's Republic of France and take PK. And stay there.
  • vikingvista
    If there is no determination and pricing of risk for profit, then it isn't insurance, regardless of its label. And as pricing is a function of individual assessments of consumption trade-offs, nothing priced or purchased at the point of a gun has any proper economic role or label other than "extortion".
  • danphillips
    viking, I've tried to make sense out of your last two or three posts. Are you actually speaking English?
  • vikingvista
    Sorry to waste your time, dan. I try not to pollute the blog with too many long-winded posts, but maybe I condense too much.

    As for insurance...

    Ted is worried, though uncertain, that he may suffer event E.

    Bill asks Ted for the details of Ted's concern. Bill gives that information to his researcher, and looks at his own finances. He looks also at risk (as determined by Ted and his researcher's information) and the event cost. Bill determines that he can make a profit reimbursing up to R dollars to Ted, if Ted pays him at least P dollars per month.

    Bill takes that information back to Ted.

    Ted then decides, based upon his own preferences and means, if he thinks that would be a beneficial trade to help him alleviate his worries.

    That is insurance.

    If Ted is forced under penalty of imprisonment to pay that premium, then the premium price doesn't reflect anyone's relative value of risk. It reflects aversion to imprisonment. That is not insurance. The proper word is "extortion".

    If Bill is forced under penalty of imprisonment to accept a certain premium price, event payout, or to ignore relevant pricing information, then the premium price doesn't reflect anyone's cost of risk. It reflects aversion to imprisonment. That is not insurance. The proper word is "extortion".

    In terms of current events...

    Unemployment insurance (as mandated in most states) is not insurance, it is extortion.

    Social security and Medicare are not insurance. They are extortion.

    The proposed insurance mandate is not insurance. It is extortion.

    Prohibiting pre-existing condition exclusions/denials is not insurance. It is extortion.
  • danphillips
    Oh, I see.
  • No_Red_Bull
    You sir are a "dead beat" because you are spewing your ad hominem nasty venom to people who may have just been laid off instead of doing something constructive such as picking up trash at your local park. You deserve nothing but disrespect for your fascist way of thinking. I hope you lose your family inheritance and have to get a job to contribute to society instead of being a leech on it. Totally worthless comment I might add.
  • you are spewing your ad hominem nasty venom to people
  • LowcountryJoe
    I flagged this comment before writing my reply. Maybe I just didn't pick up on any intended sarcasm. But on second thought, this could be a high value comment to highlight and use to point out just how over-the-top emotional some people can be. That last sentence of there is classic! Project much?
  • it's just employer (and also employee) paid welfare for dead beats.

    It's always employee paid.

    Employers know what employees will cost and determine the direct pay accordingly.

    This is part of the fraud.

    All costs of government are paid by those who labor to create value.
  • Bill Stepp
    Sam,

    My understanding is that employers do pay a tax to cover their "share" of unemployment "insurance," at least here in the People's Republic of New York. It might vary by People's Republic.
  • You have to consider carefully the reality behind the accounting.
    My last line is a summation of fundamental reality.


    When a business employs someone, they have to figure the total cost as part of the compensation, thus the 50% "contribution" the employer pays into the employee's Social Security account is merely the 50% that the employer would otherwise pay to the employee.

    The total cost of employing a person must be paid for by the productive effort of that employee AND, there must be a marginal benefit to the employer above the total cost of having an employee.

    The employer is organizing production.
    The customer must end up paying the total cost of production plus the profit margin.

    The total cost of an employee, from the POV of the employer, is the employee's compensation.
  • vikingvista
    But corporate taxes typically do diminish profits. A tax, whether levied on the supply or demand end, essentially shifts the equilibrium quantity to a lower value (assuming usual positive supply and negative demand curve slopes). The result is that the cost of the tax is paid by both ends of the transaction, with the split being a function of the slopes of the S&D curves. That is, some or most of the cost may be passed through to the consumer, but typically not 100% of it. And this holds true even considering the necessity of corporate profits.

    However, your summary statement is true if you are properly inclusive of "producers of value" to include investors, managers, entrepreneurs, etc--truly everyone who produces value to a free society.
  • Investors take a risk in proportion to potential returns, generally.

    Those who labor, generally do so for a non-speculative return.

    However, the goods and services that everyone consumes must be produced by labor, not by speculation.

    Taxing corporations puts the squeeze on everyone, labor and investors, but the corporation, as a legal fiction which does not labor or produce value, does not bear the burden of producing goods and services that people consume.

    The fundamental reality is that only people, who labor to produce value, bear the burden imposed by taxation.

    Taxes can be raised such that the corporation may not be able to make profits and so, go out of business, but in the end, it is people that bear the burden.
  • vikingvista
    Economics is about values, and only people hold values. The fact that a corporation, like the state itself, is a legal fiction has no bearing on this issue. It effects how people interact, but we are still only talking about those human interactions. We are talking only about people--shareholders, investors, suppliers, owners, and paid workers at all levels from CEO to janitor, etc.

    And to consider only people who are assembling material things with their fingers, is to make an arbitrary distinction. A voluntary transaction is a symmetric act, usually of wealth production. The CFO and investors are frequently productive in their actions as CFO and investor, no less than the person on the factory floor. There is a certain irrational bigotry in disregarding some productive efforts, while regarding others.

    But regarding the specific matter of the suppliers in a particular market versus the consumers, supply demand analysis is quite clear. Whether placing the tax on the demand curve, or on the supply curve, the effect is a split in the unit price perspectives of both, causing a decrease is the expected equilibrium quantity.

    The meaning of that is that some people who would've found it beneficial to purchase (or purchase more) at the previous lower unit price, no longer do so. And some suppliers who would've found it beneficial to produce (or produce more) at the previous higher unit price, no longer do so. Both suppliers and demanders do with less. That is the cost BOTH pay, to the benefit of the taxer.

    It helps to keep in mind that trades are symmetric. Supply and demand are an arbitrary distinction chosen from a money perspective. What is being traded in each individual trade is an amount of 'a' for an amount of 'b'. Whether you choose as a P vs Q supply and demand graph to plot 'a per unit b' versus 'sum of b', or 'b per unit a' versus 'sum of a', is a matter of which perspective you find most convenient. The purchaser at a retail store can be considered a supplier of dollars.
  • It got too thin down below

    Investors pay taxes, and their ROIs are not unaffected by government burdens.

    Paying taxes is not the same as paying the costs.

    Most wealthy people are not affected in lifestyle by taxes.

    They are defined as wealthy, not because of their consumption, but due to their acquired entitlements and ownership of capital.

    Very few wealthy people can ever personally consume their acquired entitlements, so they usually invest them.

    So if taxes means they they will invest less, their lifestyles are pretty much unchanged, but the productive opportunities that may have resulted from those foregone investments will be diminished.

    So, again, the burden of taxes will be borne by those who labor to create value, that is those whose standard of living will be reduced to pay for the resources consumed by political distribution of same.
  • vikingvista
    "burden of taxes will be borne by those who labor to create value"

    As it seems a matter of simple fact to me that investors do "labor to create value", it seems we are at an impasse here.

    The very wealthy can suffer a larger decline in wealth without noticing a change in lifestyle (assuming they chose to live well below their means), than can people who are much less wealthy. That is a function entirely of wealth, independent of the kind of productive work they do. And it is still a decline in their wealth, to the benefit of the state.
  • All an investor has to do is put money in an interest bearing account.

    Does that qualify as "value producing" labor?

    While the wealthy person's account may suffer a lower number, the resources consumed by government must still be produced by people who don't have such large accounts.

    The main result for the wealthy is that they have less to invest.

    Upon whom does that have the most impact ?
  • vikingvista
    "Does that qualify as "value producing" labor?"

    Millions of consumers say "Yes". By the way, that is rather like saying that all a patent attorney has to do is fill out a few forms. All a doctor has to do is write a few prescriptions. All a news caster has to do is read a few words. And all a farmer has to do is plant a few seeds.

    "the resources consumed by government must still be produced by people who don't have such large accounts"

    ...as wells as by people who do.

    "Upon whom does that have the most impact?"

    Now you are making an entirely different point. A rich farmer is impacted by theft much less than a nearly bankrupt investor.
  • I got so involved with the argument that I forgot my intent in making the statement the way I make it.

    All costs of taxes are borne by those who labor to create value.

    I don't have to determine who creates value, the market does.

    Everyone who labors to create value in exchange for what others create pays the costs of government.

    Well that's true of everything.

    But value is determined by what people are willing to pay, and with government people have to pay even when they aren't willing, which suggests that government provided services cost more then their value.
  • See above.

    This is as close as the system lets you delete.
  • vikingvista
    "Bank savings accounts are rather easy to open. And depositing money is pretty simple as well. Is it much more difficult to put in $100,000 than $1,000?"

    To give you an idea of how difficult I think it is...

    I won't say what I do, but I will say that it isn't investing, and I have approximately 15 years of post graduate formal education and training, including an engineering degree from a top program, advanced mathematics and statistics, a minor in philosophy, and an impressive GPA. But I would NOT recommend people take their money out of their mutual funds, hedge funds, and other investment vehicles and put them in my overeducated hands, because all I could guarantee them is a MUCH lower ROI. My best investment advise to them is to stick with their professional investors.


    "If you can think of a better way to illustrate it, please do so."

    The government takes money out of the economy, and the economy is people. Some people can be hurt worse than others, but tax policy is not a scalpel. It is an economic fact, easily demonstrated with S&D analysis, that taxing a market imposes a cost even on those who are not directly taxed, because of the taxes' effect on prices. To say that a company (or whoever is on the supply end) just passes all costs through to the demand end, is to ignore the fundamental effect of prices on people's incentives.

    Otherwise, it is of course true that stealing a buck hurts a poor guy more than a rich guy.
  • Taxes not only affect prices (sometimes in convoluted ways like Ag subsidies), but also impede economic growth and the development of employment opportunities.

    To say that a company (or whoever is on the supply end) just passes all costs through to the demand end, is to ignore the fundamental effect of prices on people's incentives.

    True, but companies must pass on their costs or feed off any accumulated savings. The cost of government can make the difference between success and failure for companies.

    Otherwise, it is of course true that stealing a buck hurts a poor guy more than a rich guy.

    And it's also true that some people make out like bandits via political control of resources.
  • vikingvista
    "True, but companies must pass on their costs or feed off any accumulated savings."

    Or accept smaller profits, or cancel growth plans, or pay smaller dividends, or suffer a fall in share price, or liquidate assets, ...
  • Consumers can only pay for goods and services if they have previously produced, or will produce value. That is the cost of consumption.

    All costs are paid by those who labor to produce value. Labor includes ANY effort, including mental, required to produce value.

    Government, being staffed by people, requires consumption. Therefore, the costs of bureaucracy, and all other costs imposed by government are paid by those who labor to produce value.

    The distinction between transactions with government and with voluntary market actors is the distinction between extortion and voluntary trade.

    The justification for taxation is that people are not willing to voluntarily pay for at least some portion of what government provides (or they find that what they are required to pay for is of no benefit to them), whereas in voluntary market, no one has to be extorted to participate in trade.

    And to consider only people who are assembling material things with their fingers, is to make an arbitrary distinction. A voluntary transaction is a symmetric act, usually of wealth production. The CFO and investors are frequently productive in their actions as CFO and investor, no less than the person on the factory floor. There is a certain irrational bigotry in disregarding some productive efforts, while regarding others.

    Labor isn't just about assembling things with your hands. To suppose otherwise would indeed be an arbitrary distinction.

    Effective decision making requires a good deal of effort and focus.
  • vikingvista
    I thought you were taking too narrow a view of production, but I see now that I was wrong. Sounds, as usual, like we're in agreement. Unless you think otherwise.
  • I make that summary statement for the benefit of visitors of the fiat economics persuasion.

    As the left has a historical sympathy for "labor", they need to discover the reality that the burden of political distribution of entitlements to consume MUST be borne by those that labor to create value.

    The "wealthy" may pay taxes, but they cannot be made to bear the burden of everyone's consumption. It is physically impossible.

    While it is possible to reduce the wealthy to the level of "the workers", the workers will only be made worse off by taking from "the wealthy" control of entitlements that they can never consume.
  • AU03
    This is what threw me off in the first comment by Sam Grove:

    "However, the goods and services that everyone consumes must be produced by labor, not by speculation."

    I read that to mean that speculators (as in entrepreneurs) had no value in the process of production, by them not being included in Sam's definition of "labor."

    The follow-up comment, "Labor includes ANY effort, including mental, required to produce value," clarified things.
  • Speculators can (and does) include even manual laborers, but if everyone speculated and no one performed the labor of creating value, everyone would starve.

    The return earned by investors is a result of their risking their own entitlements to consume to others for the purpose of creating new opportunities to produce value.

    Investment and speculation are essential to economic growth, but they are not economic production.

    What they do is make possible more economic production by providing for the consumption and capital investment required by entrepreneurial ventures.

    Successful investment (and speculation) do require effort, but do not directly produce consumable value.

    I feel like this is difficult to put across, so try to imagine land where everyone decides to stop producing goods and services (that covers A LOT of territory) and just put their money into mutual funds.

    What would the mutual funds invest in?

    Nobody is laboring to produce value, so the investments will have nowhere to go.

    Pretty soon, most people will have to actually engage in some productive activity.


    Collectivism was borne in the age of mercantilism and so, operates on the same erroneous premises.

    The soul of the redistributive state is mercantilist.
  • vikingvista
    "but if everyone speculated and no one performed the labor of creating value, everyone would starve."

    If everyone manufactured cotton swabs, everyone would starve. Sounds like you are regressing into the bigoted distinction I originally worried about.
  • It all revolves around the production of VALUE.

    If everyone were making cotton swabs, they wouldn't be creating much value.

    We have historical examples of subsistence economies with minimal speculation. They do work.
    As far as I know, there are no examples of economies based entirely upon speculation.

    Investment and risk are what make economic development possible, but they have to be directed toward making labors, of all kinds, more productive of value.
  • vikingvista
    I wonder what motivates speculators, if they are not doing anything of value?

    And I would add, that if everyone just made food, we'd all starve. Without the machinery, fuel, fertilizer, irrigation, electricity, transportation, storage, refrigeration, and the financing to make it happen, the food would be of no value to most of us.

    It's not just that you take too narrow a view of labor, you take too narrow a view of value.
  • You are projecting to little into my words.

    I said that an economy without speculation (investment and risk taking) is a subsistence economy.

    Obviously, only sociopaths would knowingly take us there.

    Unfortunately, those who subscribe to fiat economics would unwittingly take us there.

    Speculation and investment are what make economic growth possible, and therefore is of critical importance to economic growth.

    However, the BURDEN of government must always be borne by those who labor to create value. This is how all costs are paid, by value producing endeavors.

    The entitlements that speculators/investors offer to entrepreneurs are paid for by previous productive activity, however, entitlements are not edible, they are promises of payment in consumable goods and services.

    People who invest do provide a service to entrepreneurs, but the investment must have been paid for by some value producing activity.

    A value is anything that people will willingly pay for, and pay with entitlements they have earned through their own productive labor.


    How do we know that speculation and investment is a valuable service?

    People willingly pay for it.
  • vikingvista
    You seem to be talking about investment as though it is something separate from a "value producing activity" or "productive labor". Investing doesn't provide immediate caloric intake, but neither does farming.
  • Farming is an investment.

    A farmer invests a great deal of labor in producing an eventual crop.
    It also entails risk.

    I guess it depends on how you look at it.

    The involvement of money somehow removes our perception from fundamental realities.

    The question boils down to how value is determined.

    Do speculators labor to pay the costs of feeding, housing, and transporting hordes of bureaucrats?

    Do the "wealthy" bear that burden?

    I don't think so.
  • vikingvista
    Investors pay taxes, and their ROIs are not unaffected by government burdens.
  • brotio
    I think you missed Sam's point, which is that UI (and Social Security) are all costs of employment. If those costs weren't imposed by politicians (who know exactly how much liberty you need in order to be free - HT: Yasafi), then employees could be paid higher wages. Hence Sam's point that all of these costs are borne by employees. The designation of employer-contributed vs employee-contributed is merely an accounting fiction.

    Corporate income tax is a similar fiction. The taxes corporations pay are a cost of doing business that must be factored into the prices charged to consumers. Therefore, consumers pay corporate income tax. Corporations are merely collection agencies for the State.
  • MilesStevenson
    I'm interested in hearing comments from both Don and DK on what Paul said earlier in the article:

    "What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment."

    Are there good economic reasons to believe this is true? I don't know, I'm still at a 101 level, but my first response would be that it seems odd that unemployment insurance increases un-employment during normal times, but decreases it during a recession. What is it about a recession that completely reverses the behavior of this incentive?

    Also, what is the right level of unemployment that must be reached for this to be true? If Krugman believes that UI increases un-employment when national un-employment is at 5%, at what percentage would Krugman say it decreases un-employment and how does he determine that number?
  • UI is a subsidy. Everyone knows what happens to demand in the presence of a subsidy. Krugman's argument is something along the lines of, you can't call it a subsidy because that hurts my case for the welfare state.

    But don't forget, "We are at the ZERO bound" so the only theory we can use is Keynes. That's the basic premise of all of Krugman's columns now. But is there a consensus on even that?
  • lukas
    I don't know, I'm still at a 101 level, but my first response would be that it seems odd that unemployment insurance increases un-employment during normal times, but decreases it during a recession. What is it about a recession that completely reverses the behavior of this incentive?


    According to the Neokeynesians, it's the stimulus effect of giving money to people that will most likely spend it, thus creating jobs. UI is deemed to be one of the most effective forms of stimulus/pump priming.
  • MilesStevenson
    Okay. I'm also familiar with the counter-argument, that there is no stopping people from saving that money instead of spending it. Maybe vouchers would be better than cash? And I'm also assuming that this un-employment "insurance" is supposed to be temporary. Of course, we all know how effective the government is at making such things temporary.

    At any rate, is there any past empirical data that can correlate this kind of stimulus with increasing employment during a recession?
  • vikingvista
    The disincentives to productive work are only part of it. There is also the long-term resource destruction in the form of taxation, and the immediate depletion of capital markets through deficit spending that promotes a vicious cycle of perpetual capital depletion and resource destruction that further promotes unemployment and investment declines. And all this is done in the name of "stimulus" which in reality is the antistimulus of resource misallocation.
  • lukas
    Unemployed people are most likely to be cash-strapped and to spend the money instead of saving it (or paying down debt). There is some data to support this, too. I think Krugman has referred to a study in one of his recent columns, but if you ask Daniel nicely, I'm sure he'll point you to that kind of empirical data too.
  • To the dissenters in the thread... while it may be implausible that basic textbook economics simply slipped Dr. Krugman's mind as he was writing the opinion piece, is it so hard to believe that he simply doesn't show an earnest interest in serious economics anymore? That he just may in fact be more interested in partisan hackery on behalf of his beloved Democrats and their new fearless leader, Mr. Obama? Given his intellectual (and I use the term loosely here) output in recent times, it doesn't seem so far-fetched to me.

    He's the Democrats' version of Rush Limbaugh (a better-credentialed, less entertaining one) full of spiteful invective and partisan Kool-Aid drinking. If you see the world in such stark partisan terms as either one of these polemics do (e.g. Republican = Good; Democrats = Bad -or vice versa), you're either honestly confused, or else you're not at all honest about the truth, sound principles, critical thinking, or helping to make the world a better place.
  • LowcountryJoe
    I think it's lack of honesty, myself. But to come over here and put it (dishonesty) on full display shows some kind of imbalance -- a type of imbalance that may [in some circles anyway] give credence to asking for policy-makers to take choices away from us for our own good
  • Don Boudreaux
    Daniel:

    I understand what you're saying, but I don't buy it. Europe has had long-term unemployment at nearly the same rate (and often higher) that now exists in recession-America. So if Krugman-Wells cite Europe's experience as an example of what economists mean when they point out that unemployment benefits dampen incentives to find jobs, why does Krugman now find that view "bizarre" as applied to the U.S.?

    Also, Krugman's "textbook economics" phrase does, as you say, lead up to his point about Keynesian stimulus, but it is clearly in the context of pooh-poohing the idea that unemployment benefits depress incentives to seek employment. Sen. Kyl - and any almost everyone else who publicly expresses concern about the disincentive effects of extending unemployment benefits - is not challenging Keynesian theory. They're not engaging that theory one way or another. Krugman clearly, as I read him, meant to paint those of us who object to unemployment benefits as being hopelessly ignorant of basic economics.
  • JohnK
    Krugman's NYT columns are little more than Democrats good, Republicans bad, Democrats smart, Republicans stupid.

    His columns should not be interpreted as originating from an economist, rather as originating for a shameless partisan cheerleader who is not above bald faced lies to promote his cause.
  • Having traveled to Spain I met a 30 year old male who was employed with Citibank. He had been laid off and was enjoying unemployment benefits which amounted to 1000 Euro per month for I believe one year. He specifically said he was not looking for work and was enjoying his "time off." He went on vacation to Paris, enjoyed dinners out and a great bar scene that Barcelona offers. His life was comfortable and fun. If just one person feels he has no incentive to seek employment there are logically more like him. How many is immpossible to know, but it is likely enough to effect the unemployment numbers and be significant enough to say it is an issue.
  • Randy
    I've known lots of people who do roughly the same in the states - use up their unemployment benefits before getting serious about looking for work. I've even considered the possibility of taking such a vacation myself, but I can't seem to get laid off :)
  • lukas
    Well, when they tell you "I've been paying into the damn thing all these years. Might as well get something out of it," can you really blame them?
  • MilesStevenson
    And there are others like myself who's personal savings/retirement plans revolve around ripping up and throwing away future social security checks. I can't stop the government from taking my money by force, but if I earn enough personal wealth in my life, I don't have to take part in it happening to others.

    I want to help people in need as well. I have given to charities in the past and I will in the future when I'm satisfied that the money actually helps people in actual need. But I have to be careful to make sure that I don't give SO much that I end up needing charity myself. What makes me feel duped is when people like Krugman advocate policies that essentially say that the government is a better judge about how much I can give and to whom than I am. I understand he has a lot more academic knowledge than I do and might even be able to balance my own checkbook better than me. But all his models that he uses for public policy are based on all kinds of "averages" and "estimates" that don't actually reflect me as an individual person. If PK wants to be my personal financial advisor and come up with a good rational plan for using some of my money to help others in need, then I won't object. But somehow I don't think his averages and estimates for a nation of 300 million people will perform as well as my own when it comes to making efficient decisions about my money.
  • John V
    100% correct, Dr. Boudreaux.

    Our contrarian friend DK has made quite the ironic argument about how to read what others say in the best/worst light.

    I just read the article and it is clear what Krugman's motives are.

    The repugnant game (for a PhD economist and Nobel/Clark winner) of partisan polemics that Krugman chooses revel in is disgusting quite frankly. There's no other way to put it. He should be doing much better work with the pulpit is afforded in the NYT. It's biased political smut what he gives readers and I suppose smut sells well. But as an academic, Krugman must be too far long gone down the political hack road to acknowledge or notice what exactly he's doing. At this point, it's all about him, his fame and winning the Cross-Fire war of words....the lowest form of intellectual debate.

    Perhaps DK should try to rise about the rancid cesspool of political BS and view matters from a clearer perch beyond partisan hack stench that Krugman finds so intoxicatingly addictive....rather than joining Krugman in defending the stench.
  • Tired of the Bull
    This is purely an ad hominem series of invectives against someone named Paul Krugman. It is rude, repetitive, and banal. I flagged it for removal.
  • danielkuehn
    Wow - creative adjectives in that last paragraph. I don't see what cesspool of political BS I'm in. I would agree with you, as I did with mommsen above, that Krugman is hopelessly partisan and ideological. I just don't think he's forgotten or obscured as much of his economics as Don suggests he has.

    And what is an op-ed section for if not promoting values and opinions? It's not that objectionable - although it certainly deserves responses and counter-arguments.
  • Tired of the Bull
    "Krugman is hopelessly partisan and ideological." On what do you base your conclusion that he is hopeless? That he finds Bunning's behavior bizarre and that a civilized, democratic country can tolerate a former baseball player rube from throwing a corkscrew into the body politic to disrupt the lives of 100,000 unemployed people. Bizarre was a nice way of saying that Bunning is crazy, and so are the people who like his lunacy. Your attempt to placate the nuts around here is what is truly hopeless, and useless.
  • LowcountryJoe
    Okay, DK, how do you think Krugman's intended audience -- the Left -- read him? In other words, what was Krugman hoping to get across to his faithful readers? That shouldn't be hard for you to pull off since you have such a handle on deciphering Krugman's thoughts and writings. And then it shouldn't be all that hard for you to understand what most readers took from Krugman's latest piece...since you are so wonderful at mindreading and all.
  • Ha, I should have read this before I made my comment above.
    Maybe there is a "mental defect" in the brains of Libertarians (Rachel Madows and Olbermanns line of reasoning), that we just can't grasp the complex thought process and complex line a reasoning that make whatever Krugman writes true and beyond dispute?

    Or the simpler version, that Krugman cherry picks his economic facts to suit his partisan needs. What economics that doesn't agree with him, get relegated to "hangover theory," something that you really don't need to look at anyway, because the great holy Krugman has read two paragraphs and determined that isn't isn't worth anyone else's time. Which are the same tactics all partisan hacks use, both Blue and Red.
  • Mommsen1625
    Rancid cesspool; not just an ordinary cesspool. Interestingly cesspools are still used in some places in the U.S., though they are banned in much of Europe.
  • danielkuehn
    If you have to ask that question in your first paragraph, I'm afraid you don't understand what I'm saying. I don't see where he says that he finds it bizarre that UI would reduce the incentive to find a job. To quote him again, what he seems to be saying is bizarre is that that structural influence on incentives is "what we really need to worry about right now". I find it bizarre too that that is what some people think is what we need to worry about, and I certainly have never denied that UI increases unemployment and reduces job finding incentives.

    "but it is clearly in the context of pooh-poohing the idea that unemployment benefits depress incentives to seek employment"

    I fail to see where he pooh-pooh's this idea. I do see where he pooh-pooh's focusing on this idea at a time like this.
  • kurlos
    Daniel--You're saying that Krugman would agree with Don in terms of what is a fact, but disagreeing on the relevance of that fact at this particular time. Don seems to keep arguing the truth of the fact, rather than its relevance.

    Maybe I'm reading this wrong.
  • Mommsen1625
    It is always very helpful to read the entirety of a Krugman op-ed; they are almost always about pushing whatever "moral insights" that Krugman holds.
  • Mommsen1625
    The article is about how moral the Democrats are; it isn't about UI. That's the proper frame on which to judge the nature of the UI claims.
  • I agree again. I watched the entire health care summit on youtube and each democrat was there with their letter from a constituent about how they lost health insurance or can no longer afford it. The tactic of the Democrats is to demonize the Republicans and this is working while some Republicans play into it.
  • The tactics are to constantly appeal to emotion and appeal to their own authority. Throw in a little Ad hominem and you have standard Democratic talking points....all logical fallacies.
  • Mommsen1625
    The tactic of each party is to demonize the other party. Republicans did a lot of the same regarding FP during the 00s. If the Republicans have allowed themselves to get behind the eight-ball ... well, that is their own fault largely.
  • Don Boudreaux
    P.S. To be clear: I can understand someone saying something such as "The disincentive effects of extending unemployment benefits are outweighed, in recessions, by the stimulative effects that Keynesians point to -- leading, therefore, to potentially lower unemployment."

    That claim might or might not be correct (either as a matter of theory or in practice in any particular circumstance). But even if we grant that that claim IS correct, it still does not follow that concerns over the disincentive effects of unemployment benefits is "bizarre."

    If the Keynesian point is correct -- and it's hardly one that enjoys a consensus among economists -- the debate here becomes an empirical one: does the pro-employment stimulative effect of unemployment benefits outweigh the anti-employment effect of those benefits? To suggest that they do not cannot fairly be dismissed as "bizarre."
  • danielkuehn
    "But even if we grant that that claim IS correct, it still does not follow that concerns over the disincentive effects of unemployment benefits is "bizarre.""

    Sure it does. I think it's bizarre that you're worried about those disincentive effects too. I'm not calling you a monster or anything. I'm not calling you a bad economist. I'm just saying I think your priorities are completely foreign to me given current conditions. Given that I (roughly) know your ideological outlook, I can understand how you come to that conclusion - but it doesn't make the conclusion any less bizarre to me.
  • Bob D
    You would think by now that Krugman, with foot in mouth once again, would have succombed to trench mouth disease for his repeated contradictions. It is somewhat comforting to know that even Krugman doesn't believe the claptrap he spews upon the general public in the pages of the NY Times and on ABC News
  • danielkuehn
    Also worth noting - the "textbook econoimcs" point and the "bizarre" point were refering to two entirely different issues.

    "Textbook economics" referred to the multiplier effect and automatic stabilizer of unemployment insurance, which is in the textbooks and widely agreed upon (although I suppose it's contested here and there).

    The "bizarre" point refered to how Sen. Kyl prioritized his concerns.
  • danielkuehn
    Note that the selection from Krugman's textbook that you provide specifically talks about "structural unemployment", which is entirely different from the cyclical unemployment that Krugman talks about as "textbook economics" in his article.

    Post three - I know, I know. I just can't understand why you always seem to be searching out things to disagree with him on.
  • And how many of his readers will know the exact difference between structural and cyclical unemployment? No where in his column does he mention "structural" or "cyclical". Go ahead use firefox's find feature and see for yourself.

    The other problem with Krugman, is how often he appeals to his own authority in his columns. When he talks about Bill actually feeling "your pain." How the hell does he know what Clinton felt? But to the layman, Krugman is a Nobel prize winner so he must know that for a fact. it's just pure propaganda. If George Will would say the same thing about Bush, no doubt you'd have the same quip with Will as I do with Krugs.

    Of course, I know you'll say something along the lines of "Krugman never actually says that he knows everything." Well he doesn't have to, it's implicit in all of his columns. You probably just chose not to see it because it suits your biases. But I don't know because I can't read minds. How is it that you so often are defending Krugman on the grounds of "what he really meant was?" When did you and Krugman have a mind meld?
  • danielkuehn
    "And how many of his readers will know the exact difference between structural and cyclical unemployment? No where in his column does he mention "structural" or "cyclical". Go ahead use firefox's find feature and see for yourself. "

    Precisely. Why would you talk about "structural" and "cyclical" unemployment in a column if not all your readers would understand it? He described cyclically induced unemployment, though, which is the whole point.

    "How is it that you so often are defending Krugman on the grounds of "what he really meant was?" When did you and Krugman have a mind meld?"

    I don't remember making any claim to know his mind. I can read plain English, and I don't go read in the face at the very mention of Krugman's name, that's all. That's all I bring to the table on this one, Justin.
  • LowcountryJoe
    You don't understand it? Really?! Let's see, why would a free-market extolling economist ever want to find fault with another economist who sides with government-policy 'solutions' over free-market based solutions almost every single time. Gee, that's a real friggen headscratcher, there, DK!
  • sandre
    Krugman writes his columns for the muirgeos of the world(largely). His writings are duplicitous for that reason alone.
  • danielkuehn
    You too? David Henderson posted this yesterday as well.

    Read the whole sentence: "In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe."

    What's he's saying is "bizarre" is that Kyl thinks that the incentive of workers to find jobs is "what we really need to worry about right now", not the well known theoretical and empirical conclusion that unemployment insurance increases unemployment duration and incidence. With six job-seekers chasing after every one job, it's not worker incentive that is the primary problem right now. To frame it as such is what's "bizarre".

    What do you think is more likely, that Krugman forgot basic economics or that you have once again read him in the worst possible and least plausible light?

    I'll also share one of my favorite quotes about unemployment insurance, from Martin Baily: "there may be more unemployment as a result of unemployment insurance, but it matters less". Yes, we know quite conclusively that UI increases the unemployment rate and it increases unemployment duration. But an evaluation of unemployment insurance can't stop there, as if that is all that matters. We also have to think about the quality of joblessness with and without UI, the quality of employment with and without the knowledge that UI will be waiting for you, and philosophical questions about whether this is an essential public good or an untenable state intrusion. The discussion about UI doesn't end with the relatively mundane finding that it increases unemployment, although that is very good justification for keeping the program limited in duration and generosity.
  • "We also have to think about the quality of joblessness"
    Quality of joblessness? How do you define that? How do you measure it? You know as well as I "Quality" is highly subjective. To want to use that as a measure of joblessness is impractical.

    I think it is even more plausible that Krugman Streeeetched his economics to make a purely partisan point. Or do you think the Holy Krugman is immune to stretching the facts a bit here and there to try and score a political point. You are always accusing Don for stretching his economics or deliberately misinterpreting Krugman to score a libertarian point, wouldn't you say it's equally fair to hold Krugman to the same standard?
    And really that's the big beef with Krugman, he selectively uses bits of this and bits of that, that are technically correct, but uses them in a way that is open to interpretation, with emphasis on his partisan interpretation.
  • danielkuehn
    Exactly - he uses facts and applies his own partisan interpretation to them. It's called an "opinion column", Justin. It's definitely fair to hold Krugman to the same standard - like when he says that the mandate is going to lower premiums. That's bad economics with a partisan interpretation. But here as far as I can tell he's providing good economics with his own interpretation (again, the whole point of opinion columns). It's not like extending unemployment insurance in a recession is some sort of liberal agenda. The vast majority support it, so I hesitate to even call this particular column "partisan". Bunning even supported it, he just wanted paygo rules to be adhered to.
  • I agree it's an opinion. In my opinion, Krug is an ass. Remember this blog is Don and Russ' opinion as well.
  • vidyohs
    But Kuehn, dear disingenuous Kuehn, you missed JustinP's question:

    "We also have to think about the quality of joblessness"
    Quality of joblessness? How do you define that? How do you measure it? You know as well as I "Quality" is highly subjective. To want to use that as a measure of joblessness is impractical."

    I'd love to read your explanation of the quality of joblessness. Justin saved me the trouble of asking, but now you've ignored his very reasonable question, and I have to ask anyway.
  • danielkuehn
    Didn't miss it - just didn't answer it. But since you asked so nicely, I agree with Justin on the fact that it's impractical to even think about measuring it, and that it's highly subjective. But generally speaking being jobless can be hard, frightening, and demoralizing. We can be pretty confident saying that some financial support during that period can make it less hard, less frightening, and less demoralizing. Some financial support from a fund that you pay into with payroll taxes while you were employed can help families pay bills and keep buying food while they focus on looking for a new job.

    I can't wait to see how you're going to get outraged at that response.
  • AU03
    "And really that's the big beef with Krugman, he selectively uses bits of this and bits of that, that are technically correct, but uses them in a way that is open to interpretation, with emphasis on his partisan interpretation."

    It's as if he's Michael Moore, sans video camera and about 200 pounds.
  • brotio
    Krugman is within 200 pounds of Michael Moore? I didn't realize Krugman was such a lard ass! :-)
  • LowcountryJoe
    Perhaps Krugman (and his frequent defenders) should focus more on why he comes across as a hypocrite. I do not want to have to parse words or look for every nuance in someone's statements. And what Kruman writes is definitely worthy of criticism for being hypicritical. Defend Krugman if you wish; it's your own reputation that's at stake and many of us have already passed judgment on you for it.
  • muirgeo
    So because your too lazy to put the two quotes in context that makes Krugman a hypocrite? Yeah... bizarre.
  • LowcountryJoe
    I'm not in possession of a 'too lazy' so please do not ascribe one to my ownership, Doctor.

    As to the substance of your reply: reasonable people can conclude that Krugman is calling Kyl's reference to UI creating a disincentive for the unemployed to gainfully seek employement, bizarre. And clearly Krugman has put pen to paper expressing the very same thing Kyl has said. Except this time around this is somehow different? Yes, it is bizarre. It was about as bizarre as the time you commented to us about your visit to some location that was probably never set foot apon by mankind ever before, while in other parts of the same thread you posted and insinuated that mankind is the scourge of the ecosystem in which he lives and frequently damages his surroundings.
  • unconformistsheep
    I have to agree with Daniel here. Prof Krugman states in Pop Internationalism how chronic unemployment in several European countries steams from big unemployment benefits (and the common currency). In this column however, he is discussing cyclical unemployment.
  • Don Boudreaux
    And if unemployment benefits can create - and, according to Krugman, has created - chronic ("structural") unemployment it Europe, why is it "bizarre" to worry that such benefits might raise the rate of chronic unemployment in the U.S.?

    For a prominent economist to label that concern "bizarre," and to suggest that it flies in the face of some consensus among economists, is inexcusable.
  • unconformistsheep
    I have no doubt Prof Krugman knew he would be misinterpreted by the typical reader and couldn't care less. He made no attempts to differentiate between structural and cyclical unemployment. My point was merely that he is technically right. Calling him off on being incoherent isn't exactly accurate, but I guess it's fair because he placed himself on this predicament by being unclear in the first place.
    By the way, I am a huge fan. I thank you very much for your reply, and I am grateful there are libertarians in your position of authority fighting for individual liberty one letter at a time.
  • Mommsen1625
    Given that most of the article is about how Democrats are awesome and moral and Republicans are just not awesome (oh, and we need health care reform!) ... well, you get my point.
  • I agree, is Krugman merely aligning himself with Democrats in hoping to obtain a position with them? Reading his bio on Wiki he worked in the Reagan administration where he said
    "It was, in a way, strange for me to be part of the Reagan Administration. I was then and still am an unabashed defender of the welfare state, which I regard as the most decent social arrangement yet devised."
    I know everyone likes to defend what they believe in, but is he ignoring fact and logic to stay aligned with these believes?
  • Mommsen1625
    Defenders of the welfare state rarely consider the pernicious effects of the welfare state.
  • mcpoo726
    The problem with the welfare state is that it is a global disincentive. Why should I work hard to have what everybody else has even though they might not work at all? The end result is that you eventually run out of other people's money to fund the masses.
  • danielkuehn
    Hey - I never claimed he wasn't partisan :) I just said he didn't forget or obscure quite as much of his economics as Don suggests.
  • vidyohs
    I finally got around to reading the linked article by Krugman. At the street level of economic understanding where I live there is something fundamentally wrong with Krugman's stance.

    It is bizarre that people who have watched for years, even decades, how the socialist operate with their constant fear mongering against free markets in order to gain more government power, would give even a moments credence to Krugman who is so obviously in the tank for socialism.

    I think that Don was/is perfectly correct in calling him out; but, my reasons are a little different.

    This is the quote that seems to be in contention:
    "What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay."

    It is obvious that Krugman is doing the "on-again off-again" use of his own textbook ideas. But is it even decent logic? My answer to that is no. To me it looks just like more typical socialist disingenuous crap expressed to support the loony left agenda. The fact that he is claiming that “right now” is special enough to overturn, even temporarily, what he wrote in his textbook means that he will sell out his belief and principles (if he has any left) for political expediency.

    Here is why I think it is crap, not based on any textbook, but just street level observation.

    But first, the fact that for a long time now one of the fears of so-called leaders is that Americans in general don't tend to save much of their money also factors in to what is being done with a salary or an unemployment check.

    The way I see it, for Krugman's thoughts to have any validity he would have to believe that salaried employed people do not spend their money.

    If I am employed at assembling electric drills, I will use that salary to buy food, buy clothing, buy shelter, buy transportation, pay for education for my children, buy entertainment, and buy some luxuries; while likely not saving or investing a penny. All these actions require a certain number of employed people to furnish those things I will buy.

    Now I lose my job and become unemployed. I apply for unemployment and receive it and I find that it does not replace my full salary; but, does give me enough to maintain. I will use my unemployment check to buy food, buy clothing, buy shelter, buy transportation, pay for education for my children, buy entertainment, and even though at a reduced income maybe continue to buy some luxuries; while likely not saving or investing a penny. All these actions require a certain number of employed people to furnish those things I will buy.

    Even though my unemployment check will give me less money to spend than my salary did, it still allows me to behave pretty much the same as I did when employed and I still require the same goods and services.

    That being the case, some one please tell me how the spending of the unemployment check, as Krugman states as being “right now critical”, will create anymore jobs than spending the money earned as salary, when in fact it is more likely to reduce the number of people employed as my reduced spending has to affect the bottom line of the people who serve me.

    No, can't do it? I didn't think so. As a matter of fact by simple street logic, my unemployment check does indeed give me incentive to delay looking for employment, and there is no possible that it will create new jobs or increase employment in any way.

    The economy is suffering from insufficient demand; so, seriously, it is laughable to think that if I am spending my income and not creating new jobs or increasing employment, that somehow by spending a reduced income in unemployment benefits will miraculously do so. LOL, spend less money, overcome insufficient demand, and create more employment, gotta love that logic.

    In other words, we wind up permanently looking like Europe with the problems they suffer due to their generous unemployment. Conclusion, Krugman is full of shit.
  • danielkuehn
    "That being the case, some one please tell me how the spending of the unemployment check, as Krugman states as being “right now critical”, will create anymore jobs than spending the money earned as salary, when in fact it is more likely to reduce the number of people employed as my reduced spending has to affect the bottom line of the people who serve me."

    I think he would agree that spending a salary would be better. The point is, if you didn't have the UI check your spending would drop dramatically, which would only weigh down on aggregate demand more. If aggregate demand weren't already depressed, that might be a good incentive for you to find a new job. But since it is depressed and jobs are already hard to find, that additional depression of demand is the last thing we need.

    "No, can't do it? I didn't think so. As a matter of fact by simple street logic, my unemployment check does indeed give me incentive to delay looking for employment"

    Marginally, yes. But that's not what's keeping so many people out of work right now. Depressed demand is keeping people out of work. If Employers were clamoring for workers I'd be more concerned about the incentive effects of UI too. I wouldn't wany a system as generous as they have in Europe. But it doesn't even register as a real concern right now.

    "In other words, we wind up permanently looking like Europe with the problems they suffer due to their generous unemployment. "

    Nobody is saying that UI should be permanently higher. We have extended UI during recessions and then cut it back again for decades now. We're not transitioning to the European system - we're doing what we've always done.

    "Conclusion, Krugman is full of shit."

    That's uncalled for.
  • vidyohs
    Your reply, though respectfully phrased, is just chock full of hedging, tap dancing, what ifs, and maybes. It is clear from the quote I put up that Krugman does indeed claim that providing UI to the unemployed will create employment.

    It simply does not wash in street level rational terms.

    "Conclusion, Krugman is full of shit."

    In the political arena, in political opinion, in political policy, it is entirely justified.

    We've run to the mulberry bush, but this is it, I am not chasing you around it in endless circles.
  • ahbritton
    vidyohs,

    I am interested, do you know much about the field of economics? I know you use a lot of "street level" reasoning, which has its place, but it appears at least, that you do not really understand the macroeconomic issues being discussed.

    Krugman has spent his entire adult life studying, doing research, advising, and writing about market economies. To conclude he is "full of shit" I would hope you did I bit of research first, otherwise you are dismissing an entire persons professional career just because it doesn't "sound right" to you.

    What perspective are you coming from economically? Austrian school? Monetarist? Keynesian? I think you should attempt to figure out which macroeconomic perspective you are coming from, as macroeconomics has many ins-and-outs and ultimately informs what policies would be helpful in your view.

    "It is obvious that Krugman is doing the 'on-again off-again' use of his own textbook ideas."

    This isn't actually true since, having written the textbook, I am sure he is also aware that it contains statements such as "compare the effects of an increase in unemployment benefits with a cut in taxes on profits distributed to shareholders as dividends. Consumer surveys suggest that the average unemployed worker will spend a higher share of any increase in his or her disposable income than would the average recipient of dividend income… If that's true, a dollar spent on unemployment benefits increases aggregate demand more than a dollar's worth of dividend cuts…"

    Meaning that UI provides an administratively efficient method for increasing demand which outweighs any depressive affect that UI would have on incentives. And he is right that this is a mainstream viewpoint. The Congressional Budget Office, which employs several dozen PHD economists also agrees. So not only are you calling Krugman an idiot who doesn't know what he's talking about but also the general consensus of one of the most prestigious economic institutions in the US. This doesn't make any of them correct, but I would try to learn a little bit more before you dismiss thousands of professional economists man-hours of work because it doesn't match your "street level" perspective.

    Now, again they could be wrong and my previous statement is an appeal to authority and explains nothing. Except for the fact that you are flat out wrong when you say "what he wrote in his textbook means that he will sell out his belief and principles." So let's move on now that we have cleared that up (for more information on how this is consistent with the "textbook" view please see Krugman's blog titled "Supply, Demand, and Unemployment," although I will warn you it gets a little technical).

    "Even though my unemployment check will give me less money to spend than my salary did, it still allows me to behave pretty much the same as I did when employed and I still require the same goods and services."

    "…some one please tell me how the spending of the unemployment check… will create anymore jobs than spending the money earned as salary…when in fact it is more likely to reduce the number of people employed as my reduced spending has to affect the bottom line of the people who serve me."

    This is mostly correct but I think you make an illogical leap that is the main point. Yes, the unemployment check allows you to spend somewhat like you would have with a job. The people to whom you give money require your money to keep THEIR jobs. If lots of people are unemployed and don't have money to spend, the business they would have spent that money at have to lay off workers, right? In fact I am not sure how you get to your conclusion that spending money reduces employment. "…has to affect the bottom line of the people who serve me." It affects their bottom line by allowing them to pay their workers, who then spend that money on other services, and so on.

    It can be illustrated like this. Let's say everyone saved all their money, what would happen? EVERYONE would lose their jobs and LOSE money. If no one spends money there is no one to pay your salary. Businesses rely on people spending money. This is known as the paradox of thrift because it shows that saving too much actually decreases savings by taking away peoples salaries.

    "No, can't do it? I didn't think so." Actually, I just did, but thanks for answering your own question before I got a chance to disprove it.

    "my unemployment check does indeed give me incentive to delay looking for employment, and there is no possible that it will create new jobs or increase employment in any way."

    It can in the way I just mentioned. The point is whether the stimulative effect of spending the money outweighs any disincentive, and in an economy when so many are looking for work that possibility decreases significantly.

    "The economy is suffering from insufficient demand; so, seriously, it is laughable to think that if I am spending my income and not creating new jobs or increasing employment"

    I think you must not understand aggregate demand. If there is insufficient demand, increasing demand by spending money DOES create jobs. That is the entire basis of the theory of insufficient demand in the first place.


    "spend less money, overcome insufficient demand, and create more employment, gotta love that logic."

    That is actually the illogical and miraculous reasoning. Explain to me how saving increases demand? No, can't do it? I didn't think so.
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