It just so happens that extended UI causes unemployment.

I am always a bit amazed by the way anti-supply-siders interpret certain stylized facts.  They seem to start with the premise that supply-side tax effects are not important.  If you raise taxes on the rich, you get lots more revenue.  And if you lower taxes on the rich, you get lots less revenue.  I try to imagine their thought process:

Yes, the huge increase in the top MTR under Hoover and Roosevelt didn’t raise much revenue, but that was because it “just so happened” that America’s income distribution got much more equal after 1930.  No supply-side effects there.  And yes, the Reagan tax cuts on the rich were actually associated with more revenue, but that’s because it “just so happened” that the income distribution got much less equal after 1980.  And yes the Europeans don’t actually raise much more revenue than we do, despite higher tax rates, but that’s because it “just so happens” that Europeans work less.  You say they work less for tax reasons?  Don’t be silly—it “just so happens” the Germans and French have lazy, happy-go-lucky cultures.  You say the French worked as hard as Americans in the 1960s?  It “just so happens” this distinctive French culture developed only in the past few decades, when their tax rates rose far above American levels.

And then there is the debate over extended benefits for the unemployed, which at 99 weeks is far longer than under any previous recession (that I can recall–does anyone have data?)  Unemployment benefits are of course an implicit tax on labor.  If the benefits are 77% as big as the wages in the best job you can find, then they are a 77% implicit tax rate.  That makes a big difference, particularly for workers in dead-end jobs.  Matt Yglesias recently challenged right-wing economists:

That’s because Congress is unwilling to extent UI eligibility beyond 99 weeks. Which means that soon enough we should see . . . something. But what? My guess is not much. My guess is that basically nobody wants to hire the vast majority of the current long-term unemployed. So my guess is that the labor market prospects of people who’ve been unemployed for 98 weeks will look an awful lot like people who’ve been unemployed for “only” 70 weeks. I wonder what people with a more right-of-center approach would predict? Are we going to see a surge in employment among people around the 99 week mark? Will they uncover hidden secret jobs that are stashed away somewhere?

Then a commenter named “wonks anonymous” provided me with a link where Casey Mulligan discusses just such a study by Stepan Jurajda and Frederick Tannery.  They looked at the number of weeks before unemployed Pittsburghers found jobs during the period from 1980 through 1985.  They choose this period because Pittsburgh had a horrible job market, with unemployment frequently over 10% and peaking at 16%.  They found that a few weeks before unemployment benefits were about to run out, roughly 3% of unemployed workers found a job each week.  Then the number of job finders jumped to 30% during the week their unemployment benefits ran out, and stayed somewhat above normal for another 9 weeks.  That’s pretty definitive evidence that incentives matter.

Why are liberals so often wrong about the supply-side effect of taxes?  Partly because these effects go against comment sense, and partly because they seem morally distasteful.  Unemployed people really are suffering (liberals are right about that), and claims that they could get jobs if they wanted to appear to be “blaming the victim.”  I think this is wrong, and that we need to avoid letting normative considerations distort our positive analysis of cause and effect, but it isn’t easy to do.

Another problem is that people visualize a period of high unemployment as one with very few new jobs being created.  This is not true; millions of jobs are being created all the time, even during recessions.  The problem during recessions is that many more people are looking for those jobs, and hence it is much more difficult for any given individual to find a job.  But it is certainly not impossible, as we know from the jobs created and jobs lost data.  My guess is that most of those suddenly finding jobs are less skilled workers who are accepting a lower-paying job out of desperation.  The low wage job market is widely known to have lots of turnover.

To summarize, common sense suggests that Matt Yglesias and Paul Krugman are right.  And those of us with empathy for the unemployed would like them to be right.  But it “just so happens” they are wrong.  Does this mean UI is a bad idea?  As you know, I favor the Singapore approach of self-funded UI accounts.  Given that we don’t have them, and given that millions have lost their jobs due to the incompetence of America’s macroeconomists (who keep insisting that monetary policy is out of ammunition, or that there is no problem of inadequate AD), then I think you can make a good argument for providing some additional help for the unemployed.

[Update:  A commenter named “Defennder” pointed out that my statement about Singapore was completely inaccurate.  I apologize for this error, which probably appears in a few other posts.  I had recalled that the Singapore (CPF) forced savings plan could be used for health, retirement and unemployment insurance.  According to this link it can only be used for health, retirement, and buying a home.  From now on I’ll call it the UI system that Singapore should have.  The link also indicates that 96% workers in big companies (more than 25 workers) get some sort of severance package, but of course big companies can go bankrupt, and lots of workers are in smaller firms.  Severance packages are better in terms of incentives, but the coverage may be inadequate.  Singapore typically has very low unemployment rates.]

In the next post I will discuss why the extended UI benefits are worsening the recession.  Is there a way to help the unemployed without making the recession worse?  Perhaps the government might want to consider a large, one-time, lump sum payment to the unemployed, which is not in any way tied to the duration of unemployment.  I don’t know whether such an idea is feasible, but it seems better on both efficiency and humanitarian grounds than building dubious public works projects.

PS.  The preceding is not an endorsement of actual, real world, supply-side politicians.  They often do make far-fetched assertions, such as the claim that the Bush tax cuts boosted revenue.  Tax cuts usually do not boost revenue, and that isn’t even the question we should be asking.

PPS.  I don’t mean to suggest that Yglesias and I are far apart on taxes.  We both think a progressive consumption tax is optimal.

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33 Responses to “It just so happens that extended UI causes unemployment.”

  1. Gravatar of foosion foosion
    20. July 2010 at 11:10

    >>They seem to start with the premise that supply-side tax effects are not important. If you raise taxes on the rich, you get lots more revenue. And if you lower taxes on the rich, you get lots less revenue. >>
    “Lots” depends on the details, but raising taxes on the rich does generate more revenue and vice versa.

    Anti-supply siders argue against supply siders, who often claim that tax cuts pay for themselves. There is some stimulative effect from tax cuts, but not nearly enough to make up for the lost revenue.

    Regarding unemployment insurance, per this chart, since 1951 we’ve been in the neighborhood of one unemployed person per job opening, sometimes 0.5, a few brief periods around 2. At the moment, there are 5-6 unemployed people per job opening.

    Incentives matter, but if there are 5 people for each available job, it’s unlikely they’ll all get hired, not matter how eager they are. Compare the more usual situation, in which incentives would be expected to have more of an effect. Past empirical studies don’t apply, because the facts are meaningfully different.

  2. Gravatar of Ram Ram
    20. July 2010 at 11:24

    How would you respond to this (from Harvard’s Raj Chetty):

  3. Gravatar of marcus nunes marcus nunes
    20. July 2010 at 12:49

    This is the abstract of Chetty´s 2006 paper on UI:
    It is well known that unemployment benefits raise unemployment durations. This
    result has traditionally been interpreted as a substitution effect caused by a reduction
    in the price of leisure relative to consumption, generating a deadweight
    burden. This paper questions the validity of this interpretation by showing that
    unemployment benefits can also affect durations through a non-distortionary income
    effect for agents who face borrowing constraints. The empirical relevance
    of borrowing constraints and income effects is evaluated in two ways. First,
    I divide households into groups that are likely to be constrained and unconstrained
    based on their asset holdings, mortgage payments, and spouse’s labor
    force status. I find that increases in unemployment benefits have small effects
    on durations in the unconstrained groups but large effects in the constrained
    groups. Second, I find that lump-sum severance payments granted at the time
    of job loss significantly increase durations among households that are likely to
    be constrained. These results suggest that temporary benefit programs have
    substantial income effects, challenging the prevailing view that social safety nets
    create large efficiency costs by reducing labor supply.

  4. Gravatar of ChacoKevy ChacoKevy
    20. July 2010 at 13:02

    The publishers want 6 bux for the Pitt-Philly study, so I’ll have to leave the question here:
    Do we know if the people who were able to find jobs at the end of their UI eligibility got those jobs in Pitt and Philly? I respect the findings of the study, but with the real estate market correction going on right now, labor mobility isn’t something that can assist troubled labor markets.
    Were there any employer incentives in PA to hire people specifically nearing the end of their eligibility?

    I’m with foosion: at 5:1 seeking:openings, incentives only make up part of the story.

  5. Gravatar of Brett Brett
    20. July 2010 at 14:12

    PPS. I don’t mean to suggest that Yglesias and I are far apart on taxes. We both think a progressive consumption tax is optimal.

    In general, or the specific proposal by Robert Frank that Yglesias linked to?

    I like the Frank proposal as well. It looks like the type of thing that would mollify those concerned about consumer debt as well (since the incentives towards savings and investments would tend to favor saving up money for spending on “big” purchases, as opposed to using credit).

  6. Gravatar of Joe C Joe C
    20. July 2010 at 14:14

    This is a perfect time to test which theory is correct by NOT extending UI benefits….we can then see what employment does. If Congress is going to give folks more money then I would suggest something like Scott’s idea to give people a lump some payment but I would tweak it from cash to very low interest rate loans to help people attend school or new training programs. If someone has been unemployed for 99 weeks (nearly two years) then something is wrong and a change of plans is in order.

    As Scott also intimated, there are jobs; in fact there are literally thousands of database jobs which pay fairly good incomes which require relatively little education for example.

  7. Gravatar of Justin Justin
    20. July 2010 at 14:35

    I’ll take a crack at that study Ram.

    Take figures 2a-2d.

    The difference between UI of 48% of previous wage and 53% of previous wage doesn’t strike me as particularly large. For someone who was earning $600/wk previously, that’s $30/wk. Or we could look at it as cutting the implicit marginal tax from 53% to 48%.

    I think the data support Scott’s view. For someone with little (or negative) liquid resources, there is a noticeable response to just a small decrease in UI benefits – probably more noticeable than I would have expected given the difference. Claiming the cause of the response is a ‘cash-on-hand effect’ vs. work disincentives is just splitting hairs: higher UI benefits + longer unemployment duration = work disincetive.

    For someone with liquid wealth, a couple of bucks per day in reduced UI benefits doesn’t have a discernable effect (I’ll note here $200-$22,000 is a ridiculous range, as I’m sure responses for those with $500 in liquid wealth are probably far different from those with $20,000). Again, this is between 48% and 53% of previous wages – I’d expect a much larger response if UI benefits were paid out of the worker’s own savings account.

    In any case, I agree with pretty much everyone that unemployment insurance isn’t the primary driver of 9.5% unemployment, but I think it’s also quite likely the rate would be somewhat lower without it.

  8. Gravatar of Defennder Defennder
    20. July 2010 at 14:36

    “As you know, I favor the Singapore approach of self-funded UI accounts.”

    Hi Scott, could you explain what exactly you meant by “self-funded UI accounts” in Singapore? As far as I know, Singapore has no UI benefits whatsoever. Anyone seeking benefits have to draw upon their own personal saving outside of CPF. Citizens are not permitted to withdraw funds from their personal CPF accounts for unemployment benefits.

  9. Gravatar of Lord Lord
    20. July 2010 at 15:43

    At least in 1980 they didn’t have deflation to worry about. Even if they accepted a lower paying job, a few raises would soon level things out.

  10. Gravatar of Lord Lord
    20. July 2010 at 15:47

    It probably has more effect with lower wage earners because UI represents more for them. When I last had it, it amounted to 10% of my wage, no incentive at all, yet it still took all that time just to find something crummy.

  11. Gravatar of happyjuggler0 happyjuggler0
    20. July 2010 at 17:01

    I’d love to see an experiment here on lump sum vs traditional UI. Make it random, with half of all US (or any other country) workers in any location getting lump sum benefits and the other half traditional weekly(?) benefits. Track lengths of unemployment, and then eventually end the experiment when one or the other shows workers going back to work sooner.

  12. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    20. July 2010 at 17:08

    It is always wrong to focus on one incentive to the exclusion of other incentives and disincentives confronting people at one particular time. For example, getting caught for not taking a job and being fined is a disincentive. Taking the risk that you will be able to find a better job is a disincentive. Not having medical insurance is a disincentive. Plus, the amounts are pitiful. I contributed to UI for 35 years before using it and was shocked at what I received, and my benefits were high. I also looked for a job for six months. It was distressing.

    If there are such people, who either take a job the week after UI ends or who are scamming UI benefits, they should be easy to find. When people were scamming Worker’s Comp, I read or saw many stories about such people. In the one story that Mulligan mentioned on his blog, they didn’t even bother to follow the people or ask them what they were doing. They asked the employer.

    Finally, Chetty is much more convincing than that earlier study. But to say incentives matter is useless unless you bother to see how they are actually being weighed by people as against every other factor in their life that they are weighing.

    BTW, if UI is such a problem, wouldn’t it make sense to discourage charity to the unemployed as well?

  13. Gravatar of happyjuggler0 happyjuggler0
    20. July 2010 at 17:14

    P.S. I’d also love to see the shape of the return-to-work curve for both samples.

    By the way, does anyone know what the data show on wages at new jobs for those returning to work from unemployment? Specifically I want to know what the average wage as a % of the previous job is for each point on the return-to-work curve.

    I’d hypothesize that those that return to work very quickly are mostly receiving comparable wages to what their old job was, while those who don’t get jobs until they are on the other side of the “U” (i.e. those who go to work when their UI runs out; the overall curve looks like a U) are taking jobs with wages far below their old jobs. If this is true then it is clearly a case of reservation wages being the reason for not taking a new job, not laziness.

    This (i.e. wage differential along the return-to-work curve) could be a key persuasion tool for explaining to others why refusing to extend UI isn’t a moral issue, it is an efficiency issue.

  14. Gravatar of scott sumner scott sumner
    20. July 2010 at 18:18

    foosion, The Yglesias data doesn’t conflict with my post. I acknowledged that it is harder to find jobs during this recession. You said:

    “Incentives matter, but if there are 5 people for each available job, it’s unlikely they’ll all get hired, not matter how eager they are.”

    This is the wrong way of thinking about the problem, as you simply assume that UI has no effect on the total number of jobs. The claim is that UI reduces the total number of jobs, and that less UI would increase the total number of jobs.

    Yglesias asked whether the disincentive effects of UI hold up when unemployment reaches high levels. The Pittsburgh study suggests it does. I’m not sure why you think the study is irrelevant.

    Ram, I don’t have time for detailed comments. But I don’t agree with his premise that the work disincentive theory implies the disincentive effects should be just as high for high wage workers. There are all sorts of differences between low and high wage workers than makes long periods of unemployment very different for the two. The income effect may be more painful for low wage workers, but many of the other effects (social, human capital formation, etc) make long term unemployment especially difficult for higher wage workers (who are often married.) A construction worker who wins two year’s wages in a lottery might take two years off from working. A fast track professional is very unlikely to do the same.

    marcus, Thanks. I have to go with the consensus view until his study has been validated by other studies.

    ChacoKevy, I don’t know. If the study was done well, they would have only used in-state people, otherwise the study is pretty meaningless. But I didn’t do the study, so I can’t say for sure.

    Once again, one’s common sense is extremely misleading when looking at these sorts of questions.

    Brett, He doesn’t provide specific rates, but I’d probably prefer slightly lower rates. In addition, I’d favor a much simpler structure—a progressive payroll tax. This way people don’t have to file tax forms at all. The money is simply withheld, just as with the current FICA.

    Joe C. Yes, we may get a test, but my hunch is that in the end the benefits will be extended.

    Justin, Thanks, your comments make sense. I’ll try to take another shot at it tomorrow. And I do agree that UI is not the main factor in the current high joblessness, even Casey Mulligan admits that.

    Defennder, Thanks, I added an update to the post with the information you provided. That was an embarrassing mistake on my part.

    Lord, The problem in 1980 was that nominal raises didn’t mean real wage increases.

    Lord#2, That makes sense.

    happyjuggler0, Yes, that would be a great controlled experiment.

    Don the Libertarian democrat, I don’t see the study Mulligan links to as providing a shred of evidence that people are “scamming” the system. I am very interested that you see it that way. My hunch is that this is why Yglesias’ view is more popular. People instinctively believe that most unemployed are not scamming the system, and they are right. Then they assume if they believe that, they must also believe Yglesias is right–but they are wrong about that.

    It is wrong to pit Chetty against the study Mulligan links to—they are looking at somewhat different questions. Chetty is confronting numerous studies that show a powerful disincentive effect even when unemployment rates are not particularly high.

    Happyjuggler0#2; You said;

    “If this is true then it is clearly a case of reservation wages being the reason for not taking a new job, not laziness.
    This (i.e. wage differential along the return-to-work curve) could be a key persuasion tool for explaining to others why refusing to extend UI isn’t a moral issue, it is an efficiency issue.”

    Exactly, I wish more people saw it this way.

  15. Gravatar of Mr. E Mr. E
    20. July 2010 at 19:16

    This the the wrong issue to address at this time:

    The small disincentive not to work is hugely overwhelmed by the level of long term unemployment. I wonder if anyone around here has been unemployed for longer than 6 months. I have. Let me assure you that the Unemployment check didn’t cover rent, much less food. UI in the 80’s and 90’s was at much higher proportions of income. My mom asked me about 5 months in – “you’re doing ok, right? Unemployment covers about 60% of your former income.” For me, it was closer to 20% of my income. We lived off retirement savings.

    I just read a story the other day about a guy who hired someone and had to tell the other 3 finalists they were not getting the job. 2 of them cried. I guess UI must have run out on these lazy bums.

    And you usually do a good job of staying focused on the forest. All that, who cares about price stability stuff – we need growth first and stability second.

  16. Gravatar of johnleemk johnleemk
    21. July 2010 at 00:17

    Mr. E,

    I don’t think Scott is saying that those on UI are worthless/lazy bums. He’s not even saying that they don’t need help — he concludes by saying that given the US does not have self-funded UI (which would not have the terrible effects at the margin which the current UI system has), and given the terrible consequences of having no UI at all, the current UI system is defensible.

    What Scott is arguing is that we could still reduce the level of human suffering while also increasing the speed at which people find employment if the UI system became self-funded. Living off your savings, as you had to do, isn’t something to be ashamed of or something unreasonable — it’s why savings are there. The problem is Americans don’t save enough.

    Scott’s proposal is (if I’m not misreading him) that everyone have a special UI savings account which they must contribute at least a minimum portion of their income to. Low wage earners will receive a wage subsidy as well, but not the unemployed — the unemployed will be expected to live off the savings they accumulated while they were employed.

  17. Gravatar of Tim Worstall Tim Worstall
    21. July 2010 at 00:20

    I dig this paper out every time this subject gets mentioned. From Richard Layard (don’t know how well known he is over there but he’s the intellectual godfather of welfare reform over here):

    “The rationale for welfare-to-work is simple. If you pay people to be inactive, there
    will be more inactivity. So you should pay them instead for being active – for either working
    or training to improve their employability.
    The evidence for the first proposition is everywhere around us. For example, Europe
    has a notorious unemployment problem. But if you break down unemployment into shortterm
    (under a year) and long-term, you find that short-term unemployment is almost the same
    in Europe as in the U.S. – around 4% of the workforce. But in Europe there are another 4%
    who have been out of work for over a year, compared with almost none in the United States.
    The most obvious explanation for this is that in the U.S. unemployment benefits run out after
    6 months, while in most of Europe they continue for many years or indefinitely.
    The position is illustrated in Figure 1. The vertical axis shows how long it is possible
    to draw unemployment benefit, and the horizontal axis shows how long people are actually
    unemployed, as measured by the percentage of unemployed who are out of work for over a
    year. The association is close, and it remains close even when we allow statistically for all
    other possible factors affecting the duration of unemployment.1”

    The reason that the US seems to be getting European levels of long term unemployment is that the US has European levels of paying people to be long term unemployed.

  18. Gravatar of Indy Indy
    21. July 2010 at 02:21

    I have a relative in the hotel industry in New Jersey who had to lay off some room readying staff last year because of what he calls “The Depression in my business”. They all remain on unemployment. He has recently tried to hire a few of them back at their old wages, but he was turned down in each case, much to his surprise.

    He asked why and they all had a similar explanation, that they were able, for a time, to watch their kids at home while still collecting enough money to get by as their unemployment checks, combined with their husbands’ incomes, was ‘sufficient’.

    Working again would be a big deprivation from their family life and a lot of effort but without much of a gain in money vs UI – and since much of their real consumption took the form of government benefits, that small amount of money means less than you might think. This is the whole real-MTR’s-of-the-income-of-the-poor problem in stark relief.

    They said they liked working for him, and the wages were acceptable, and they would call him back when their benefits were about to expire to see if the offer still stood. “Don’t you have to say you’ve been looking for work and can’t find a job?” – “Yeah (giggles) but nobody checks anything. Anyway, it’s mostly futile looking, we don’t expect to do any better than going back to the hotel eventually.”

    My relative was just amazed. Not appalled, or contemptuous of lazy bums, (because, he assured me, these are *very* hard working, trustworthy, and reliable women.), but just floored that the system as it is encourages this behavior as the natural and reasonable response of normal people.

    I have another relative who works on the North slope of Alaska. The reality is that it’s simply seasonal work, impossible at certain times of the year. But, he asserts, the “way the system works” is that thousands of men are hired “full time” and then ceremonially fired at the end of the season and then rehired again the next year.

    And, of course, they get to go on unemployment for the six months they’re off work. Between good-pay for six months, and UI every year for another six months, he does very well for himself on only half a year’s work. He spends his off-time in Wisconsin, which is an odd place to escape the winter but tells you just how harsh Alaska can be. He is an average conservative small-government type who doesn’t at all think he’s part of any scam or scheme. I’m sure it’s “just the way these things work” to him.

    He told me this year, when they extended unemployment eligibility to two years, along with some health-care benefits, a lot of the regular guys simply didn’t come back for the season, but “that’s ok, there was less work because business was down this year anyway”. (Any connection between the two? You be the judge.)

    What these phenomena do to distort the picture and interpretation of the unemployment data is anybody’s guess. Are these people “unemployed and looking” or “unemployed and discouraged” or have they “dropped out the workforce” or what? Unemployment seems to me to be very bimodal this time – with a lot of decently-skilled people desperately seeking decent-paying work and failing to find any (new graduates in particular) – but also a lot of people in a wide spectrum of degrees of “sitting it out” insofar as they are capable of doing so. What is the effect of all this on our social norms and work ethic? Who knows? But UI extension is not the clear and simple “moral imperative thwarted only by greedy callous Republican bastards” that progressive politics makes it out to be.

    The reality is that most of the layoffs and the supply of long-term unemployed workers, come from a period more than a year ago. Even 99 weeks (4 times the old “six months”) doesn’t last forever, and most of these folks will become quite desperate for any work at all in the next few quarters. More interesting times in our future.

  19. Gravatar of scott sumner scott sumner
    21. July 2010 at 04:31

    Mr. E, I think you are slightly misreading my post. I am not denying there are lots of people in exactly the situation you described, nor am I denying that there are lots of people in the totally different situation described by Indy a few comments later. Anecdotes are a bad way to determine public policy.

    Even if you favor UI, our current system is not very good. Many (most?) unemployed people don’t even qualify for UI. That is why we need a forced saving system in this country. Americans save far too little. We don’t need a bit more saving, we need people to go from saving 0% of their incomes to saving 30% of their incomes. And we need to force them to. Asians save at those rates on far smaller incomes than most Americans. The government should contribute for those Americans who really are too poor to save (and no, I don’t consider middle class people to be poor, as most Democrats do.)

    I also indicated that since we don’t have that system, you could argue for a one time lump sum payment to the unemployed. So I’m not sure we even disagree.

    In addition, in economics there is always the seen (direct effect) and unseen (indirect effect.) UI causes higher unemployment rates. That means UI makes it harder to find jobs. If we are going to do anecdotes of people suffering, how about those suffering because they can’t find jobs due to UI?

    Thanks Johnleemk.

    Tim, I agree.

    Indy, Yes, there are plenty of people like that, and also plenty of people like Mr E.

  20. Gravatar of scathew scathew
    21. July 2010 at 05:21

    “And yes, the Reagan tax cuts on the rich were actually associated with more revenue”

    Not really:

  21. Gravatar of Mrs. Davis Mrs. Davis
    21. July 2010 at 06:59

    Frank’s “Progressive Consumption Tax” sounds like the current Income Tax with net change in “savings” as a new deduction. Any tax that requires me to report my income to the IRS and me to make payment to the Federal Treasury is an income tax. Any tax I pay and the seller remits when I buy goods or services is a consumption tax.

  22. Gravatar of JTapp JTapp
    21. July 2010 at 07:13

    Off-topic, but Dr. Sumner are you following the debate in the FT among Rogoff, Delong, etc. (and Krugman on his blog)? Rogoff making the argument that getting long-term deficits in order will allow CBs to pursue much greater QE. Delong arguing that the Fed is already pursuing loose QE… I think it’s a softball for you, wish they’d have asked you to write a column.

  23. Gravatar of GreenGenes GreenGenes
    21. July 2010 at 07:31

    Mike Konczal has a good post on the liquidity benefits of UI. It has interesting data on Austria, which gives unemployment benefits in the form of a lump sum.

  24. Gravatar of Lord Lord
    21. July 2010 at 08:58

    A few data points. The previous time I had to find another job I took a 30% cut. The last time it would have been more like 60%. One thing you find out fairly quickly is if you can live off 10% of wages, it is easy to live off 0% of them.

  25. Gravatar of scott sumner scott sumner
    21. July 2010 at 09:57

    scathew, Krugman’s post addresses all of the Reagan cuts. I certainly agree that they did not increase revenue. I referred to tax cuts for the rich. (His post actually proves nothing, BTW. It is a simple graph.)

    Mrs Davis, There are income taxes in form, and income taxes in content. The form of what he proposes is similar to our current income tax, which you and I both object to. But the content is a consumption tax, as income minus savings equals consumption.

    JTapp, I just saw the Krugman column. I don’t see why we need fiscal austerity to have monetary stimulus, indeed monetary stimulus would make fiscal austerity much easier. I’ll take a look.

    GreenGenes, I commented on that paper above. I didn’t notice the Austrian data, but that makes me favor the lump sum approach even more strongly. I still question his estimate of the size of the liquidity effect, as I don’t buy his assumption that there is no reason for incentives to affect low income people more than high income people. There are lots of reasons.

    Lord, I’m not quite sure what you mean.

  26. Gravatar of Declan Trott Declan Trott
    21. July 2010 at 18:58

    UI and jobs: if I randomly select 10% of Olympic athletes and threaten to shoot them if they don’t win a medal, they might perform better. It doesn’t change the total number of medals.

    Hoover: the Great Depression “just happened”, and as you have pointed out elsewhere, actually opened the way for higher taxes and bigger government.

    Reagan: I don’t think anti-supply-siders (me, I guess) would accept as obvious that revenue rose under Reagan, relative to any reasonable counterfactural. The stylised fact in my head is “Reagan cut taxes and there were big deficits. Clinton raised them, conservatives predicted disaster, and there were big surpluses. Bush cut taxes again and there were deficits again.” Of course you can go back and forth with this for ever (Internet bubble etc). But given Piketty & Saez’s work, it would take a lot to convince me of your point of view.

  27. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    22. July 2010 at 13:18


    I’m sorry. I got hung up on other things. Here’s the Mulligan post I was referring to:

    Unfortunately, it can’t be linked to any longer. The point was that the Anecdotal Evidence he liked was limited to Employer’s Responses. They didn’t even bother to ask the workers what they were doing. It looked to me like the workers were scamming the system, but you simply couldn’t tell because there was no follow up.

    In fact, in the studies, I don’t remember any follow up of any kind. No one even bothered to interview the people making the decision. Instead, they used gross numbers, and posited an explanation. That’s not good enough where actual human beings are involved. It might indeed be evidence, but it’s far from conclusive unless you want to believe it, or assume Political Economy just needs people voicing opinions about data.

    If this problem is so clear and easy to see, why can’t you find any of the people doing this, or put any effort into discovering them? After all, it’s a crime!

  28. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    22. July 2010 at 19:37

    Here’s a quote from Solow that makes my point in Economese:

    “An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste. There are competent workers, willing to work at the prevailing wage or even a bit less, but the potential job is stymied by a market failure. The economy is unable to organize a win-win situation that is apparently there for the taking. This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal. The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that. But this is exactly the sort of explanation that does not pass the smell test.”

    If you are going to use expectations, for example, you have to really investigate people’s motives, unless you’re a Behaviorist and only care about Correlation. Instead of a looking at Anecdotal Evidence in news stories, Mulligan could have looked at this:

    “Chris Gaun notes that we don’t have to theorize about what’s scaring businesses. We can ask them instead. The National Federation of Independent Businesses — a small-business trade association that is considered the most right wing of the major business groups — continually polls its members and releases the results. Here’s what they say is their single most important problem…”

    BTW, I like Mulligan. Solow again:

    “This is hard to explain, but I will try. Most economists are willing to believe that most individual “agents” – consumers investors, borrowers, lenders, workers, employers – make their decisions so as to do the best that they can for themselves, given their possibilities and their information. Clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad first approximation in many cases.”

    I think Mulligan does a good job of setting up the problems and the basis for further study.

  29. Gravatar of scott sumner scott sumner
    23. July 2010 at 04:43

    Declan, That is the old “lump of labor fallacy” that there are only so many jobs to go around. In the Olympics greater effort does not increase medals. In economics, greater supply of labor most certainly does increase quantity demanded, unless the laws of economics have suddenly changed.

    I am not saying the tax increases caused the depression, I am saying the tax increases caused the income distribution to look much more equal.

    I did not say the Reagan tax cuts raised more revenue, nor do I believe it. I said the tax cuts for the rich raised more revenue, a very different proposition.

    Don the libertarian Democrat, I can’t comment, because the link is broken.

    Don#2, I agree that sales are the biggest problem, but I don’t agree with Ezra’s methodology. Asking people is not a good way to do macro. Macro effects almost always look different at the micro level. There is the fallacy of composition. Very few people understand, for instance, how a small decrease in the monetary base can cause a recession. It doesn’t relate to their personal experience. All they notice is the drop in demand for their product.

    I agree with Solow about DSGE models, although I am not qualified to discuss the issue in detail.

  30. Gravatar of Declan Trott Declan Trott
    23. July 2010 at 15:18

    Yes, I know about the lump of labour, and I have done search macro. All the evidence in your post was about individual job finding probabilities, so my example still stands.

    How many vacancies are going unfilled in the US right now due to lack of search effort by the unemployed? How many more vacancies would employers find it profitable to create if the unemployed 10% of the labour force searched like there was no UI? My guess is “practically none”. (I believe Krugman made a similar argument a while ago. The short side binds, right?)

    What other Reagan tax cuts were there?

    I was implying that the Depression massively reduced capital income, which reduced inequality. (And then WWII compressed the wage distribution.)

    I might be wrong on all these issues, though I would need a lot of convincing. But I thought the point of your post was to imagine the thought processes of someone who thought differently from you, even if your tongue was partly in cheek.

  31. Gravatar of ssumner ssumner
    24. July 2010 at 16:32

    Declan, I am still not convinced. I don’t see anyone refuting the Pittsburgh study, which was done at a time of high unemployment.

    Reagan had a 30% across-the-board tax cut for all income brackets in 1981-83. Then in 1986 the top rate was cut from 50% to 28%, but lots of loopholes were closed. I recall reading that the 28% bracket collected more revenue than the old pre-1980 70% bracket, but obviously there are many ways to examine the data. No one seriously denies that Reagan’s middle class tax cuts cost the government lots of revenue.

    Someone should check to see how much income taxes the top 1% of American paid as a share of GDP in the late 1980s vs the 1950s when the top rate was 90%. I’ll bet it was higher in the late 1980s, but am not certain.

    Sorry to imply you didn’t know the lump of labor fallacy. I get so many comments I often respond too quickly.

  32. Gravatar of Declan Trott Declan Trott
    25. July 2010 at 19:30

    But the Pittsburgh study only talks about individual probabilities – the gun to the head. It says nothing about the GE macro effects (at least the bits you quoted).

    If you think of the labour market in terms of simple supply and demand, any increase in supply will do nothing to increase employment if supply already exceeds demand. If you think of the filling and creation of vacancies (and wage offers) as being dependent on the ratio of job seekers to vacancies (modified for search effort), I would guess this ratio is already so high that fiddling with UI won’t do much. Maybe I’m wrong, but it’s a totally different question.

    I believe Piketty & Saez do something like the top 1% thing you talk about. IIRC they also argue that there was a jump in revenues caused by Chapter S (?) corporations folding once the personal income tax went below the corporation rate. Feldstein made a big deal out of this but it’s a wash as far as total revenues go.

    Anyway, those are the stylised facts of an anti supply sider. (Although I think I actually agree with you about US vs European hours worked, once you add in the income effects of all the services the taxes pay for.) I’ll let you get back to the more important task of Fed bashing.

  33. Gravatar of ssumner ssumner
    26. July 2010 at 10:43

    Declan, This whole thing was started by people like Yglesias and Krugman saying “How can you expect workers to find jobs when there are no jobs.” I believe that complaint is addressed by the Pittsburgh study. I agree it doesn’t address the macro effects, which is basically the fiscal stimulus question. And of course that is very complicated. But there are other fiscal stimuli that would also boost AD without a disincentive to work. Lower payroll taxes, or lump sum payments to the unemployed.

    I’ll pass the the Saez study. I did read a summary, but am not qualified to address the technical issues.

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