Misleading moralistic macro

Continuing in the theme of cognitive illusions, I’d like to discuss how moralistic reasoning distorts our view of macroeconomics.  Consider the following from Salon.com:

During the recent fight over extending unemployment benefits, conservatives trotted out the shibboleth that says the program fosters sloth. Sen. Judd Gregg, for instance, said added unemployment benefits mean people are “encouraged not to go look for work.” Columnist Pat Buchanan said expanding these benefits means “more people will hold off going back looking for a job.” And Fox News’ Charles Payne applauded the effort to deny future unemployment checks because he said it would compel layabouts “to get off the sofa.”

The thesis undergirding all the rhetoric was summed up by conservative commentator Ben Stein, who insisted that “the people who have been laid off and cannot find work are generally people with poor work habits and poor personalities.”

Both liberals and conservatives are engaging in moralistic thinking, and both are wrong.  They’re fighting the age-old battle over whether the unemployed are the “deserving poor” vs. the “undeserving layabouts.”  To utilitarians like me, there are no “just deserts,” just more or less utility as a result of various public policy options.

I don’t see any evidence that the unemployment problem is caused by laziness.  Or perhaps I should say that I doubt the work ethic of the recently unemployed is much different from the employed.  There are definitely people who would rather not work if they didn’t have to (like me), especially those with dangerous, dirty, or unpleasant jobs.  Or lots of exams to grade.  But people also like money, and I’d guess the vast majority of unemployed people would rather be back at work.

But the liberals are also wrong; 99 week unemployment insurance probably does modestly raise the unemployment rate.  It’s only natural that a person who loses a fairly good job would like to return to a fairly good job.  A laid off accountant would be foolish to accept a job as a maid, janitor or coal miner.

But the main point of my post is that it’s a big mistake to form opinions about the impact of macro policies on the basis of personal observation, or intuition about human nature.  And that’s because of the fallacy of composition.  If an accountant losses his UI and becomes desperate for work, that doesn’t increase his chances of getting his old accounting job back.  But if every unemployed worker loses his or her UI and becomes desperate for work, it does increase the chances of the accountant getting his job back.  The reasons are complex.

Let’s start by assuming that UI doesn’t affect NGDP, rather the path of NGDP is determined by the Fed.  Of course Krugman and Eggertsson would not agree, they’d argue that less UI would reduce NGDP.  But recent actions by the Fed indicate that they won’t let inflation fall below about 1%, and that also puts a floor on NGDP.  Every time the economy weakens, the Fed does more QE, or at least more talk about future expansionary actions.

If we hold NGDP constant, then how does eliminating UI raise RGDP?  It does so by sharply boosting the supply of labor, which depresses the equilibrium nominal (and real) wage rate.  Workers who are desperate for work now throw themselves onto the job market.  Suppose each worker becomes willing to accept a job paying 40% less than his former job.  This lowers wages at all levels, and for any given NGDP that increases employment.  It is equivalent to a rise in AD.  The accountant who suddenly becomes willing to be a bank teller, paradoxically is more likely to get his old job back, because the general expansion of the economy that results from lower wages leads to a greater need for accountants.  Of course this process wouldn’t work perfectly, but there would be some tendency for employment to increase.

So the liberals are right that the unemployed aren’t lazy, but the conservatives are right that less UI would reduce the unemployment rate.

By now you might have assumed that I am advocating cutting UI.  If so, you are again engaged in moralistic thinking, assuming that someone making a technical argument is actually making a normative argument.  I don’t have strong views on exactly where the UI cut-off should be.  In the long run I’d like to see the system reformed to include more self-insurance, but for right now you can make a respectable argument for keeping UI in place, despite the modest increase in unemployment.  It does reduce suffering in the short term, suffering caused by needlessly contractionary policies instituted by policymakers who may not even know a single unemployed person.  (Oops, now I’m being moralistic.)

One other quick example of the problems with moralistic thinking.  Liberals say cutting the estate tax favors people like Paris Hilton.  Conservatives counter with stories of family businesses that must be sold off to pay the estate tax.  If these were actually the two arguments, I’d go with the liberal view.  I’m a utilitarian who thinks a dollar is worth much more to a poor person that a rich person.  But I want to abolish the inheritance tax precisely because it’s not a tax on the rich; it’s a tax on capital, whereas we should be taxing consumption.  We need a progressive consumption tax.

Part 2:  Always avoid annoying alliteration

I just noticed that my last three posts have been entitled Disinflation denial, Avoid asymmetries, and “Misleading moralistic macro.  I apologize.

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19 Responses to “Misleading moralistic macro”

  1. Gravatar of Philo Philo
    19. December 2010 at 10:00

    “I don’t see any evidence that the unemployment problem is caused by laziness. Or perhaps I should say that I doubt the work ethic of the recently unemployed is much different from the employed.” Yes, I think you should put it the second way, especially if we interpret “laziness” as a matter of degree, so that even a rather industrious person is “lazy” to some (small) positive degree. Then there would almost certainly be less unemployment if there were less laziness generally in the work force. That does not imply that the unemployed are on average lazier than the employed (I would bet that they are, *on average*, but you may be right that they are not *much* lazier). And it does not imply that laziness is the *principal cause* of our high unemployment–a very implausible thesis, given that unemployment was *much* lower just a few years ago.

    Of course, as you point out, a beneficiary of the dole’s being pickier about what sort of job he will accept is not *laziness*; it is simply rational behavior.

  2. Gravatar of Rod Everson Rod Everson
    19. December 2010 at 10:18

    I’ve been thinking about a solution to this and believe I’ve come up with a less “moralistic” approach. (I haven’t really thought this all the way through yet, by the way.)

    First, simple economic logic dictates that people being paid not to work are less likely to seek work, especially if the pay for working isn’t significantly higher than the pay for not working. Granted, there are exceptions, but generally this is true.

    So, instead of taking away all the payments, or possibly any of them, once a person is qualified for, say, 26 weeks of unemployment compensation, just give it to them even after they start working again.

    That is, once the system says they’re entitled to, say, $300/week for the next 39 weeks, rather than offer them the “choice” of going back to work or sitting home and collecting $11,700 from the taxpayers, just give them the $11,700 whether they go back to work or not.

    But do it this way: When they get a job with, for example, 22 weeks of payments still due them, give them 44 more weeks of $150 checks even though they are working.

    This would, in the end, save taxpayers money in two ways:

    1. Congress would hesitate to add another 13 or 26 weeks to the schedule because they’d be adding a huge amount to all the people now working but still qualifying for payments so all these extensions would be likely to end. (Instead, they should protect the chronically unemployed with other programs, such as food stamps and rent and fuel assistance, as we actually already do.)

    2. Although people would be still collecting unemployment, they’d be paying tax on both those payments and the earnings from their jobs.

    This would reverse the incentives. A person could actually take a lower-paying job and end up with as much or more money than he was making at the old job in some cases. Anything over about $4 an hour would put more money on the table for the person getting $300/week without working.

    Now, I see some obvious problems with this, but I’ll stop here for now. In the meantime, does anyone see any merit in this approach?

  3. Gravatar of Nels Nels
    19. December 2010 at 11:45

    Here’s a timely NBER paper on optimal unemployment insurance in a world of job rationing unemployment during recessions and matching friction unemployment during normal times: http://www.nber.org/papers/w16526.pdf

    Intuitively, rationing of jobs during recessions means that job searching creates a negative externality which diminishes efficiency loss due to the disincentive effect of unemployment insurance. In other words, the social cost of unemployment insurance is less during recessions, so, on the margin, optimal policy uses more generous unemployment insurance during recessions.

  4. Gravatar of scott sumner scott sumner
    19. December 2010 at 12:35

    Philo, I entirely agree.

    Rod, I’ve discussed that idea many times here. I agree with you. But it does raise a slightly more serious moral hazard problem, as unemployment can be “forced” in certain situations.

    That’s why self-insurance is my preferred option.

  5. Gravatar of scott sumner scott sumner
    19. December 2010 at 12:37

    Nels, Thanks, That sounds reasonable.

  6. Gravatar of Benjamin Cole Benjamin Cole
    19. December 2010 at 14:51

    I agree with this post 100 percent. I suspect Sumner’s favorite television character was Spock of the Enterprise.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. December 2010 at 15:21

    Actually Scott, I thought the titling was clever: it improves memorability.

    Benjamin: Of course, he wants folk to live long and prosper.

  8. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. December 2010 at 15:27

    My first job was in the (since abolished) Commonwealth Employment Service dealing with unemployed people in the 1982-3 recession. (I had never had a job before, so naturally the public service thought the best use of my talents was advising folk on their job prospects.) I later worked in various labour market economics/stats areas. I find the “blaming unemployment on the unemployed” approach utterly tedious.
    (1) Unemployment shifts dramatically because of changes in economic conditions.
    (2) Long-term trends in unemployment occur because of institutional (usually regulatory) factors.
    (3) There are sorting processes about who gets and stays unemployed, but this does not change (1) and (2).

    Really, it is not so hard.

  9. Gravatar of TGGP TGGP
    19. December 2010 at 18:05

    “which depresses the equilibrium nominal (and real) wage rate”
    But don’t you believe that wages are (downward) sticky?

    If we’re going to have UI, it should be a lump-sum which a person does not lose if they take a new job.

  10. Gravatar of Scott Sumner Scott Sumner
    20. December 2010 at 15:15

    Benjamin, I have several favorites, very unlike Spock. I suppose they’d be Basil Faulty, the old cop on Barney Miller, and Kramer on Seinfeld.

    But Spock was my favorite Star Trek character.

    Lorenzo, Good points.

    TGGP, I’ve argued for the lump sum approach on this blog, but it does create something of a moral hazard problem. The optimal system would rely heavily on mandatory self-insurance.

    Wages are sticky, but they do gradually respond to shifts in labor supply.

  11. Gravatar of Floccina Floccina
    21. December 2010 at 13:51

    Excellent post.

    I have always thought that unemployment benefits do not foster sloth but do encourage work in the non taxed economy. The non taxed economy is under the table work for cash or mostly wives of good earners producing for in family consumption.

  12. Gravatar of Floccina Floccina
    21. December 2010 at 14:03

    BTW I advocate an hourly wage subsidy though it would be tough to police. I believe that Charles Murray advocates a payment to each adult USA citizen. All these eliminate the need for UI.

  13. Gravatar of scott sumner scott sumner
    21. December 2010 at 18:53

    Floccina, I thought an hourly wage subsidy would be a great idea back when I was a grad student. As you say, it might be difficult to implement.

  14. Gravatar of BGP BGP
    22. December 2010 at 18:52

    don’t you mean “all apologies”

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. December 2010 at 06:47

    On the unemployment front this graph is deeply depressing. (Via, which has some more depressing graphs and tables.)

    BTW I have extended my above comment on unemployment, and shown I have learnt things from reading this blog, in a post here.

  16. Gravatar of Doc Merlin Doc Merlin
    23. December 2010 at 21:48

    @ Lorenzo from Oz:

    It looks even worse when you look at the employed as a percent of population instead of unemployment numbers.

  17. Gravatar of Scott Sumner Scott Sumner
    24. December 2010 at 17:38

    BGP, Yes, all apologies aimed at all alert analysts.

    Lorenzo and Doc Merlin, Yes, this really is the Great Recession.

  18. Gravatar of reason reason
    29. December 2010 at 08:06

    Scott, I think the argument about UI is even more complicated than you allow here. If everybody became desperate for a job and offered themselves at much lower rates – some (perhaps many) firms would respond by replacing large parts of their workforce, or forcing their workforce to accept nominal wage cuts. And then prices would have to fall (i.e. general deflation). It is not obvious that a fall in nominal wages would lead to a fall in real wages and a rise in employment.

  19. Gravatar of Scott Sumner Scott Sumner
    30. December 2010 at 09:28

    Reason, No, I do understand that argument, made by people like Krugman, but I don’t agree. I think the Fed is targeting inflation and won’t allow deflation (which explains QE2). If I’m right about Fed policy, then lower wages are expansionary when unemployment is high.

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