Tuesday, January 21, 2014

Krugman on UI... and another great big sigh of disappointment for the economics blogosphere

Krugman derangement system can be pretty impressive sometimes, but the recent spat has to win some sort of prize. I've commented in a few places on it, but I thought this blog might need a little break from the more serious minimum wage wage posting I've been doing.

Russ Roberts recently accused Krugman of lacking intellectual credibility because he mentions a micro labor supply effect of unemployment insurance in his textbook but in a recent blog post he criticizes Robert Barro for inferring that because of these micro incentives, the idea that UI can reduce unemployment is (to quote Krugman's paraphrase) "self-evidently absurd".

Of course it's not "self-evidently absurd" at all. You can have negative incentive effects and a reduction in unemployment quite plausibly if the unemployment rate is high because of demand problems. There is no contradiction whatsoever. And Russ Roberts, with a PhD from the University of Chicago, should be able to understand this point.

Then David Henderson jumped in and I thought things would get a little more sane when I read: "The issue--and everyone on both sides agrees that this is the issue--"... and I was SURE the next line would say "is whether or not you can acknowledge negative incentive effects and still argue that UI reduces unemployment".

Because THAT is what the issue is, and David is usually mild-mannered and to the point and I honestly expected that's what I would read next. But no, it continues: "is whether Krugman is being hypocritical in his discussion of unemployment insurance."

A good alternative to this is Chris Dillow's post. He starts by referencing Bob and Russ, but he doesn't say anything like "The issue--and everyone on both sides agrees that this is the issue--is whether Bob and Russ are being jackasses to Krugman"

Because there's a point where the Krugman derangement syndrome gets old and we need to focus on the economics if we really want to be an economics blogosphere.

For what it's worth Barro clearly understands there's nothing even passingly hypocritical in Krugman's case. Barro writes:
"Yet Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving "aggregate demand." Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed. Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment. As per Mr. Vilsack, the administration believes that the cumulative effect is a multiplier around two."
Of course, he goes on to dispute the argument, and that's fine. As I said above - THAT should be the real question here: who is right about the effect of UI. But despite disagreeing, Barro knows full well that nobody says that the incentive effects aren't there, they say that they are overwhelmed by other effects when the economy is demand-constrained.

Krugman is obviously not a hypocrite. That is NOT the question at hand. Krugman does not lack intellectual credibility. Krugman is not the embodiment of Orwellianism (a comment on Russ's blog). Let's get back to economics, people.


  1. There are people who imagine themselves engaged in some titanic personal struggle with Krugman who in truth are not qualified to fill his water jug.

  2. I'd make a different, simpler, argument for why unemployment benefits can increase employment. And yes, in the context of a search model. Suppose that receiving unemployment benefits is contingent upon active job search. And suppose the monitoring technology here - checking that those receiving the checks actually look for jobs - is adequate. If unemployment assistance is sufficiently high workers and sufficiently low prefer being employed to being unemployed and receiving assistance, which they prefer to not being in the labor force. So unemployment assistance increases the incentive to search for jobs, which results in higher employment. Note that this means it results in higher employment-population ratio, not necessarily lower unemployment rate (which could go either way, depending on details).

    So there's an optimal level of unemployment assistance here if the goal is to maximize employment. Too low and lots of workers drop out of labor force (since that saves them the effort of searching). Too high and no point in taking found job offers.

  3. "is sufficiently high workers and sufficiently low..." --> "is sufficiently high and sufficiently low, workers..."

  4. When your model doesn't encompass recessions, is it any wonder even their existence is doubted, leaving nothing to explain? Model myopia where one thinks the model is all there is so one focuses on minor detail as the explanation for what cannot occur under it.


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