Friday, January 25, 2013

Casey Mulligan Seminar at GMU

[UPDATE: Just to clarify - as I say below, Mulligan claimed that labor supply effects of these programs "a lot of the increase" in non-employment. He doesn't say all. When I talk about being concerns that "he's explaining the Great Recession" with these labor supply effects, I mean I'm concerned that he's using that one gross effect on its own - not that he's alleging that he has completely explained it. If you want to say something about the impact of the safety net on non-employment, you cannot just look at labor supply and then formulate your conclusion. If you want to say something about the impact of the safety net on labor supply, then of course you can just look at labor supply.]
[UPDATE 2: OK, Casey Mulligan just went absolutely nuts on me over email and said some very insulting things - apparently completely misconstruing the post. Let me give some take aways I intend here:
1. I think labor supply effects are important - that's why I wanted to go see him.
2. I think you can't talk about the impact of the safety net without talking about labor demand effects.
3. There are a lot of issues I'm still getting my head around so I want to read more.
4. There are a lot of concerns I had about the seminar that may be in the book so I want to read more.
5. You all should think about the arguments that Casey raises.]
Yesterday I went to see Casey Mulligan speak on his book Redistribution Recession at GMU's workshop on philosophy, politics, and economics. I misjudged how long it takes the shuttle to get from the metro to campus, so I came about ten minutes late into a packed seminar room, but it was worth going and hearing the details of Mulligan's argument (and if I ever attend again I'll definitely be on time!). I'm taking a few slides from his AEI talk, which seems to have been essentially the same as the talk I saw yesterday.
His argument - in my own words - is that unemployment in the Great Recession has been so bad because changes to the safety net have raised marginal tax rates, which has reduced labor supply. The second half of that thesis, stated in that way, is eminently reasonable. Part of my interest in going was that we talked about the marginal tax rates implicit in safety net programs all the time at the Urban Institute, precisely out of this concern for the counter-productive impact on labor supply.
The first half of the sentence, stated that way, is what people are incredulous about - not the idea that the safety net has labor supply effects.
I came out of it intrigued enough by his argument to take a look at his book, despite some very questionable analysis at the New York Times by Mulligan that had put me off him for a while. As you'll see, though, I mainly want to take a look at his book because I either did not get the entire argument in the seminar or I think he made a weak defense of his case in the seminar - not because I think he clearly had the right answer.
I know this is long - the real meat of the problem is in the third section: "Assuming his own conclusions?"
Marginal tax rates
Mulligan began by describing the many changes to safety net programs that occurred during the Great Recession and the impact that these had on marginal tax rates. The idea is that if you have a benefit that's contingent on low income (like SNAP - i.e., food stamps) or not working (unemployment insurance), increasing your labor supply is going to reduce your income because those benefits go away - so it's like you're being hit by a tax by moving from poverty to somewhat-above-poverty. This has been a concern for safety net and labor market policy design for a long time. Mulligan's question is whether this can explain the decline in employment we've been experiencing.
Using an approach I'd have to read the book to get a better sense of (involving eligibility for certain programs and income levels), Mulligan aggregates these marginal tax rates to get an average marginal tax rate for prime age heads of households. It's very hard for me to compare Mulligan's aggregate marginal rate measure over time with other marginal rate measures I've seen calculated over the income distribution, but looking at - say - Gene Steuerle's numbers over the income distribution, it seems like Mulligan's rates that top out at just under 50 percent in 2009 are plausible if you were to take Gene's rates and get a population average.
Mulligan switched back and forth between talking about marginal rates and program generosity, but the measures are essentially the same - take the decline in generosity associated with an increase in income and you've basically got a marginal tax rate. The generosity changes, mapped against hours not at work, are presented below:
Now Mulligan was quick to note that he knows these two series are endogenous. "Don't call the causality police on me!", I believe were his words. I believe he knows that, but I could not for the life of me understand how that knowledge informed the rest of his analysis (which is another reason why now I want to see the book to understand if it ever informed any of his analysis). The endogeneity problem is very serious. Mulligan concludes that a lot of the increase in non-employment is due to safety net generosity, but if in fact safety net generosity is due to increases in non-employment, it's no wonder you would find these results. The actual role of labor supply could be considerably diminished.
He seemed unconcerned with endogeneity. My impression of the reasons for this was that he was taking labor supply elasticities from the literature and using his measure of increases in benefit generosity to estimate the change in labor supply. If these estimates are well identified, then the endogeneity is not a problem because he's not estimating the relationship from the (highly endogenous) relationship depicted in the graph above.
Which elasticities?
I had a very tough time getting my head around the elasticities he used to simulate labor supply changes (which I'll show you below). He said he was using Frisch elasticities and he was clearly using intensive margin elasticities. The intensive margin is the choice of how many hours to work. The extensive margin is the choice of whether to work or not. What concerns me is that Frisch elasticities (and perhaps others?) are very different depending on whether you estimate it at the micro or macro level. Since we're looking at macro series here, presumably we'd be interested in macro elasticities, but Mulligan and Peter Boettke (the workshop organizer) kept talking about it as a micro story.
The programs have very different impacts on the extensive and intensive margin. Increased unemployment insurance generosity has a big impact on the extensive margin, because if you go back to work you lose all of it all at once. Food stamps, on the other hand, impact the intensive margin because you can get them while you're working, but the level of benefits phase out as your income increases. It would seem tough to combine these.
I think everything is probably above board here. Mulligan finds large effects, which is what you'd get if you use macro labor supply elasticities that incorporate both intensive and extensive margins. It was a little confusing that it was referred to as a "micro story" in the seminar (maybe they just take "micro" to mean anything that's behavioral?), but I know he was definitely looking at macro labor supply. Anyway - the elasticities were one area where I'd be interested in taking a look at the book.
Assuming his own conclusions?
All the material above is just my general sense of the issues and some things I want to learn a little more about. The really glaring problem with Mulligan's presentation that I asked him about but I feel like he kind of dodged is that he just ignored the demand side of the programs he looked at. After explaining the aggregate marginal tax rates, he showed us a simple aggregate labor supply and demand graph he put together using actual data and estimates of the labor supply response to changes in marginal tax rates (see below). The origin is the 2007 Q4 equilibrium. The 2009 Q4 demand schedule is to the right of that because population grows and that sort of thing. It's presumably not as far to the right as it might have been because he did take wealth effects into account. This may be an overly generous assumption on the demand side, I don't know. Let's give him that one, though, because even bigger problems come up later.
Mulligan's primary conclusions come from the simulations of labor supply at 2009, Q4 with the actual safety net (the red line) and labor supply at 2009, Q4 if there had been the same less generous safety net that there was in 2007 (the pink line). It makes sense that the pink line is to the right of the red line, because we do expect the marginal tax rates to have a negative effect on labor supply (so removing them has a positive effect). What's incomprehensible to me is how he draws any conclusions from this, because he does not simulate what 2009 Q4 labor demand would look like if benefit generosity was reduced to 2007, Q4 levels!
To put it another way, Casey Mulligan sat in the seminar room and essentially told all of us "if you look at the supply effects but don't show any demand effects it looks like supply matters a lot and these programs I'm looking at explain a large share of the downturn". And I was the only one to ask him about it!
I tried to keep the comment simple because there was a lot of trashing of Keynesians in the seminar room. Bryan Caplan talked about how he knew a lot of Keynesians at Princeton and that they are not Keynesians because they care about the data - they are Keynesians because of the feelings of introspection they have about workers. Peter Boettke called it "magical thinking". These comments got lots of chuckles of approval, so I didn't want to come out brazenly in a seminar room that clearly didn't think much of the point (after already having snuck in late!), so I just asked why he didn't simulate a shift in labor demand the way he simulated the shift in labor supply. Mulligan's response was that he did do it in the book along with some other sensitivity tests. What happens in those analyses? No word on that.
What concerns me a lot is that he is going around presenting half a supply and demand model as his headline result, when the labor demand impact of these policies is substantial. Remember, nobody is taxed today to pay the unemployment insurance benefits today. People are taxed, of course, but most of the benefits come out of a trust fund. Food stamps, Medicaid, and tax credits are a little more complicated. They don't come out of a trust fund but they added to the deficit which is financed with money that was not going into investment otherwise.
Multiplier estimates are good to look at to think about the net effect of combined supply and demand shifts because they take both into account, and these estimates suggest Mulligan is making a big mistake by not presenting a full supply and demand story. Zandi estimated that the multiplier for food stamps is 1.73, suggesting that (for that program at least), the labor demand effect that Mulligan ignores is bigger than the labor supply effect that he estimates.
This also makes me wonder what's in the book, but if he is presenting this as his primary result and didn't give me details when I asked, I'm concerned.
What about the rest?

My prior on the economics and the policy of the Great Recession is that we had:
1. A big negative demand shock in response to the financial crisis.

2. A big positive monetary/fiscal/TARP response. You can say it wasn't enough so it wasn't "positive". I'm just saying that it was a big positive relative to doing nothing. My baseline is no policy change, rather than "the policy change that would have fixed everything", which makes it a positive.

3. A small negative effect from the labor supply effects of the safety net.

4. A medium positive effect from the labor demand effects of the safety net.
So in the section above I talk about how Mulligan covers #3 and ignores #4 (or apparently leaves it in his book but doesn't think it's important enough to present). The other problem is that he completely ignores #1 and #2, and tries to assert that he's explaining the Great Recession!

While I may get an answer to what he thinks about #4 in the book, I doubt I'll get much of anything on #1 and #2.

Notice that endogeneity bias and identification issues come back in the picture here. Even if the observed fall in hours is accounted for by the labor supply effects of the safety net (I don't think it is for the reasons I stated in the previous section), you can't conclude that and say demand side stories don't matter! You have to know whether fiscal and monetary policies improved the economy relative to the counterfactual of what would have happened otherwise.

That's a very hard thing to do, of course. You are going to need a lot more data - more countries and more time. Mulligan said he's interested in this, but hasn't had time to do it. That's fine. What really concerns me is that he's willing to draw conclusions like this before getting the other data.

When you see people like Barro, Romer, Ramey, or Vernon arguing over fiscal multipliers they look at all this data in an effort to generate a counterfactual.

To put it bluntly - based on the seminar presentation - Mulligan seems to think it's sufficient to (1.) note a labor supply effect while not mentioning the labor demand effect, (2.) use labor supply elasticity estimates to estimate the magnitude of that effect, and (3.) determine your counterfactual on the basis of that result and some accounting for population growth and that sort of thing.

I may be misunderstanding something (again... why I think it might be worth looking at the book), but I'm not personally left convince by it.


  1. Daniel --

    I wish you would have introduced yourself after the seminar. My comment about "magical thinking" wasn't directed at Keynesianism per se, but to the sort of aggregate demand deficiency stuff -- in short, I was just asking for microfoundations (which I think Mulligan is supplying at least in part). I also think Bryan was endorsing an aspect of Keynesianism (which I would also reject as emotive reasoning as opposed to economic reasoning, but that is another story).

    But you raise good probing questions. Please next time (and I hope there are other times), introduce yourself to me. I am much better in person than my social media persona :) and I would very much like to interact with you and learn from you.


    1. Thanks for leaving thoughts - as I said, I was the one that came in late (sorry!). I had intended to say hi before the seminar, because I couldn't stay long after 3:30. Vallier's talk looks interesting - I think I'll try to swing by again. Thanks again for making this public knowledge.

  2. Mulligan, a case of inbred thinking or secret political ambitions? Who cares? He is not worth wasting one's time on.

    1. I think this is (mostly) wrong. If by "inbred thinking" you just mean that the environment at Chicago keeps him from exploring these concerns, there's likely some truth to that. It's interesting, isn't it, that you don't get any really deep analysis of the multiplier out of Chicago, isn't it? It all comes from Berkley, Stanford, Harvard, etc.

      I don't think there are any secret political ambitions at all.

      He's worth spending time on for a couple reasons:
      1. It's a common argument among the public, even though economists are more skeptical
      2. There is something to it. Labor supply reactions to the safety net is very real, even if they're not the only thing we should be looking at.

      I sympathize - his dismissal of everything else is frustrating.

      I personally can't help but thinking of the seasonal-unemployment argument that he gave for why this is not a demand side recession, and I just cringe when I think of that.

      I sympathize, but I don't think the answer lies in closing ourselves off.

    2. What dismissal? There is no evidence he even conceives of these effects. He exhibits no conception of macro so naturally he will not address those issues, nor any conception of an argument since he won't even examine any contrary evidence. This is just legalism at its worst, assume the conclusion and marshall whatever he can to justify it while ignoring anything that doesn't.

    3. This is my summary of a seminar. The paper focuses mostly on the MTRs, its true. But there's a whole book behind this, remember?

      And he did talk about aggregate demand arguments in the seminar, so he certainly "conceives of these effects".

      The problem, in my view, is that he is content with drawing broad conclusions from one piece of the puzzle, not that he doesn't understand macro. I do agree he is effectively assuming his conclusion. I think the right response to that is to talk about it and point that out.

  3. To grossly over-simplify your description of Mulligan's argument it sounds like he is taking a simple demand and supply for labor chart and showing that benefits for the poor caused the supply curve to move to the left and this explains a large part of the high unemployment in 2009. I assume (but am not sure) that he would accept that the demand for labor had itself moved to the left between say 2007 and 2009 ?

    Your objection to his argument is that while you agree that increased benefits may have caused the change in the supply curve he is ignoring the fact that these same benefits (by stabilizing AD) also prevented the demand curve from moving to the left more than it did.

    I think the reason Mulligan ignores these demand side effects is because in his model wages are flexible and employment quickly moves to its equilibrium level. Its only if wages are not fully flexible and they end up above their equilibrium levels that such demand side effects comer into play. For example if the equilibrium wage level was $10 an hour but inflexibility led to it being stuck at $20 then there would be unemployment that had nothing to do with marginal tax rates. In this scenario paying UI and food stamps benefits would help to shift the demand for labor curve to the right and closer to equilibrium. In the flexible scenario the demand curve would still shift to the right but have little effect on employment rates beyond the short term as it is already at equilibrium, just one with higher unemployment than people feel comfortable with.

    BTW: What did he have to say on the minimum wage ?

    1. He didn't mention anything about the minimum wage that I recall, but that also doesn't really have anything to do with marginal tax rates (that I can think of...), which was his focus.

      I have concerns about your third paragraph. I don't agree that unemployment and surplus labor or non-clearing labor supply are the same things. You can have an equilibrated labor market with lots of unemployment. When we count the unemployed, we ask them if they want to work and if they're looking for work. We don't ask them if their reservation wage is above the equilibrium wage.

      The implications of this are substantial and - in my opinion - under-appreciated. It means that a lot of people on the labor supply curve to the right of equilibrium are unemployed even if the economy is in equilibrium.

      Besides, Mulligan doesn't even look at unemployment (I think that's the right choice). He looks at employment (specifically, hours). A negative demand shock is going to reduce hours even if everything is in equilibrium, and a positive demand shock (from the safety net) is going to increase hours even if everything is in equilibrium.

      If you want to talk about non-clearing markets that's another thing but that's a whole different issue. The big concern, I think, is lots of people not working.

      I know this is not the way a lot of people talk about unemployment, but I think it's the right way to talk about it.

    2. OK, I can see that there are 2 ways you could view equilibrium in the labor market.

      1) The wage rate and employment level that would prevail in a healthy economy at full employment
      2) The market clearing wage rate in an economy where demand for labor is depressed and unemployed workers will not accept jobs paying significantly less than they used to earn.

      Would you hold the view that (other things held equal) simply increasing AD sufficiently would cause a move from 2) towards 1) ? If so then I guess its logical for you to view policies like UI and food-stamps as having both a positive effect (increased AD) and a negative effect (at the margin some workers will prefer leisure to work).

      I would be interested in Mulligan's views on the demand-side effects. I am guessing that he thinks the key for a fast move to full employment as defined above is a flexible labor supply that will accept a fall in nominal wages in response to a fall in demand for labor. Without that in his view increased AD (especially from polices that are detrimental to the supply of labor) will have little effect on demand for labor.

    3. The reason I brought up minimum wage is that if the market-clearing wages in some low-paying jobs fell the minimum wage then that would cause involuntary employment.

  4. Scott Sumner basically convinced me of the tremendous importance of Aggregate Demand in this recession and most others in our history, but Mulligan makes a point I haven't seen answered: why have most industries (aside from construction and manufacturing) reduced their labor inputs without reducing their non-labor inputs, even increasing production? I know that sticky wages make labor special, but the deadweight loss story is supposed to involve non-labor inputs also being idle while businesses give up on trying to sell all the output they could produce. The latter bit is something Nick Rowe often emphasizes.

    1. Imagine if you paid a worker 10 years worth of salary under the agreement that they could not quit for the next ten years. Imagine you had other workers that you paid on a biweekly basis.

      If you had a demand shock, how would you produce your output?

      I would cut the labor that had a marginal cost associated with it and use the labor that had no marginal cost associated with it

      This is basically what a capital good is. It's a factor of production that you pay a lot to have in the beginning in anticipation of production in the future. There might be some variable costs associated with it (maintenance, etc.), but not much compared to labor.

  5. Yikes, it ate my previous comment. This will be shorter, then. I thought you might be there, but I felt weird introducing myself it that didn't turn out to be you.

    My takeaway:

    1) I don't think he was evading your question. I think it was a combination of difficulty managing two questions and that the question wasn't super clear. The point about the demand effects of the safety net is good, but I didn't get that until reading it here.

    2) The "make the elites feel good" is a pretty bad political economy explanation.

    3) I got the impression that he dealt with the endogeneity problem by referencing estimations in the earlier literature. We didn't have that chapter for PPE, unfortunately, so we didn't get that reference list. I'm sure you could email him and ask--he seemed very approachable after the seminar.

    4) He claimed that he was only explaining about half of the increase in unemployment, I don't think he was throwing demand explanations out the window. That seems reasonable to me-- that would explain the difference in unemployment between e.g., the US and the UK. Supply side effects can be underestimated but still not the whole story.

    Maybe I'll remember what else I had written, and comment again. (It ate this comment as well, but I copied it...)

    1. re: "the question wasn't super clear"

      Ya, maybe I should have just taken the "I'm a big fat Keynesian and I want to you to talk about multipliers!" approach :)

    2. re: "2) The "make the elites feel good" is a pretty bad political economy explanation."


      It's good I didn't raise my hand then. I would probably have been kindly asked not to come back.

    3. I checked the filters - didn't see another comment so it must not have even gotten loaded up right. Sorry :-/

  6. Not knowing anything about this I found this video quite useful:

  7. Daniel,

    FYI: These were uploaded by Mulligan and he allows comments, so could use that forum to ask him questions.

    1. I don't think he reads comments at his blog, although I ask questions every once in a while. If his Economix pieces don't show up on blogspot, he can remain unaware of that for a long time.

  8. My two cents (where my aversion to AD/AS is prominent):

    Questions like these is where I think AD//AS is a blunt tool that cannot shine much light on the topic and why I generally grind my teeth whenever I see it. I sorely wish myself that Casey Mulligan had chosen another means of exposition that focused on how specific incentives affecting a specific part of the economy affects employment. As such I think that both his exposition of his fundamental thesis in AD/AS as well as your critique of his thesis by that same means of discourse are both not really getting to the heart of the matter and that is again the question of specific incentives affecting specific parts of the economy.

    For instance, when addressing the question of how the demand-effects of the multiplier for food stamps affects employment, drawing a AD/SD diagram and showing a shift of the AD line to the right is not going to tell us anything about what is actually happening in the economy. To think it is, to be self-indulgently belligerent, magical thinking. To actually answer this question, we have to actually look at what specific types of goods are then bought and what type of labor would then be demanded as a result of people wanting those. I don't have the data myself for how spending resulting from food stamps flows through the economy, but I bet it would be far more ambiguous than more spending= more employment, something more akin to more spending = more spending in sectors that would have not otherwise fired employees. Whereas you would count this as a positive demand-effect, I would consider it a negative demand-effect, wait for someone to actually give me a case for it being a positive demand-effect, and not weigh it against a negative supply-effect.

    In addition, even if there were positive demand-effects, I also do not think it is obvious that this will increase employment, especially if Mulligan's thesis is correct. The reason for this is that we have to keep at the forefront not the aggregate employment totals of the economy determined by the AD/AS diagram, but rather the choices faced by specific people. After all, even if there is an increase in AD that increases GDP, it may still be the preference of people to remain unemployed and dependent on welfare programs. Mulligan's point about how the number of hours worked by different groups exposed to different incentives, most fully seen when comparing people of different marital status and therefore different effective tax-rates, further corroborates this.

    I wish he just left out the AD/AS diagram and went more into just how much successful postdiction can be made by simply looking at their effective tax rate. One provides more reason to believe in his thesis; the other barely added anything to his presentation and I think you're fundamentally making too much ado about it. What matters is not to what side AD shifted and our addition of AD-shocks, but rather how the incentives for individual people changed with the change in welfare programs and what we can say about those incentives changing economic behavior.


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