Ryan Murphy has a short paper out at the Beacon Hill Institute on state-level fiscal policy. Much of the paper is a discussion of supply-side and then demand-side determinants of unemployment. The state policy discussion seems to motivate the paper, and then come back in at the end.
I was intrigued by the attribution of up to a 2.7 percent increase in the unemployment rate to unemployment insurance in the supply side discussion (he also talks about lower estimates). I thought the estimate was much lower, but I don't know the literature (and it's not clear what study produced the 2.7 estimate). Most of this section is about lowering the NAIRU, which is always nice but not at the top of my list during a depression.
I was a little surprised to see this sentence in the demand-side discussion (he is referencing sticky wages): "these (or very similar) problems must be present for there to be unemployment caused by the demand side". Sticky wages and prices give us a reason for thinking that the short run aggregate supply curve to be upward sloping. They also may explain why the labor market doesn't clear (or maybe they don't, if you just figure that observed sticky wages are a function of a relatively elastic labor demand schedule). But it doesn't seem right to me to say that you need sticky wages for unemployment due to weak demand.
It's bothered me for a long time that people associate unemployment with a surplus in the labor market. If you think about our definition of "unemployment", it has nothing at all to do with reservation wages or whether the labor market fails to clear. To be "unemployed" you simply have to want a job but not have a job. In other words, a clearing labor market with low aggregate demand and therefore low labor demand is going to generate what the Bureau of Labor Statistics counts up as "unemployment" and which we very much care about as "unemployment".
The crux of his argument against state fiscal policy, which appears after the demand section, is that states do not have the power of the printing press, and therefore pay higher interest rates and risk bankruptcy in a way that the federal government doesn't.
I suppose I see where he's going with this, but this doesn't really make sense to me. State and municipal bonds are denominated in dollars just like federal bonds. The Fed doesn't just cancel the federal debt - it inflates it away (potentially), but this is something that states and localities can benefit from as well. I'd think one point we could make is that revenue is more volatile at the local level than at the federal level, and combined with higher borrowing costs this can put localities in a bind.
I've noted on here before that I wish states and localities did more stimulus, both to reinvigorate federalist principles and because it is precisely sub-national government that is the biggest drag on recovery. If I had to think up risks of that approach it wouldn't be that the Fed is a national institution. That seems entirely irrelevant since all these debts are denominated in dollars. It would be that state economies are far more open than federal economies, so you would need coordination of this sort of effort.
1 hour ago