Money for nothing

I learned a few things from this EconTalk podcast with guest Casey Mulligan discussing his book, The Redistribution Recession.

One argument from the right against unemployment benefits is that it encourages people to stay unemployed so they can keep receiving it.

A standard retort from the left to that argument is that the unemployment payout is so small that nobody would choose that paltry sum over getting a job.

Mulligan points out that the sum is not trivial. Here’s Mulligan from about 24 minutes into the podcast (bold is mine):

Typically before the recession, unless you are well into the upper half of earnings, when you lost a job you got half of your earnings replaced. So if you used to earn $600 a week, you’d get an unemployment check for $300 a week. And I guess you are referring to kind of that $300 dollar number–it seems $300 isn’t very big. Well, if you earn $600–I earn more than $600 myself–but if you earn $600, then $300 is not all that trivial. Number one.

…number two: There’s all kinds of taxes you don’t have to pay when you are unemployed. Payroll taxes–forget about it. You don’t pay it when you are unemployed. A big chunk of income taxes you are not going to pay when you are unemployed. So when you put all of that together, without even getting to other help you might get from food stamps or Medicaid, put it all together, before the recession about 70%, maybe a little more, of your earnings would be replaced. Not half. And that’s without getting into, like I said, other types of programs.

And when you start with 70% as your baseline–so you are going to get 70% on the old rule, and you are going to put a bunch of new rules* in there–it pushes the 70% up to 85 or 90%. I don’t think we can call that trivial any more.

*The new rules Mulligan mentions earlier in the podcast are expansions made in other programs during in the recession like food stamps, mortgage payment relief and health insurance subsidies.

So, think about these choices:

Choice 1: Get a job making 70% – 100% of what you use to make and give up 40+ hours a week. After paying taxes and paying for more of your food, mortgage and health insurance, you are really making about 50% – 80% of what you use to make.

Choice 2: Don’t get a job (or at least not an official job). Keep making 70%+ of what you use to make.This includes unemployment and other programs. Keep the 40 or more hours of free time during the week, where you might find things to do for others off-the-books for extra cash (which maybe brings you to more than what you use to make).

After learning this, the ‘the unemployment payout is so small that nobody would choose that paltry sum over getting a job’ argument seems much less compelling. I’d say that it would be more of a surprise for someone to give up Choice 2 for Choice 1.

The whole podcast is worth a listen.  There are a couple other points Mulligan makes that I’d like to mention.

One (and some of this may be a mix of Mulligan’s points and my own). Unemployment is more of a choice than a condition that folks find themselves in ‘through no fault of their own.’

He contends that use to be the social norm. If you lost a job, there was more expectation on you to not burden your fellow citizens and to do something productive. So, for example, you were expected to have been responsible and saved for a rainy day when you did have a job. You were expected to make tough choices in your own budget to trim the fat. And, you were expected to find another job and take it and make ends meet, even if it was for less pay that what you used to make. At least you were being productive, responsible and continuing to add to your own work experience and skill set that may lead to bigger and better things.

The ‘social norm’ seems to have shifted to view what you use to earn and the budget choices you made then were things you were entitled to keep and that being out of job is something that you have absolutely no control over.

Two. The cost-benefit analysis of unemployment benefits has shifted. Unemployment benefits use to be viewed as a stop-gap to help folks in transition. It wasn’t really thought of something that would help the economy. Now the benefit-side of the cost-benefit analysis includes stimulative effects to the economy. But, Mulligan does a good job of addressing that belief:

It does put money in a group of people’s hands; it takes it out of another group of people’s hands. And the net reduction in the economy is actually less spending. Because, you know, you have less work going on. So there’s less total income to be spent. And so the people who are going to suffer from that, depending on the industry they work in, they are going to see the drop in demand for what they make. And they may not appreciate my story; but they don’t understand–they need to appreciate: Why aren’t their customers spending? If you drill down to the bottom of that you are going to see that the safety net expansions are a big part of it.

Here Mulligan makes an atomic connection that so few others do. Income and spending derives from wealth creation (i.e. doing productive things), not the other way around. All unemployment benefits do is shift who is spending the wealth that is being created, so since you have fewer people creating wealth, there will be less overall spending.

In fact, this reminds me of a post of mine from 2011, Government is overhead.

keynesian economists misjudge the economy

Natural disasters like hurricane Sandy tend to spur the following food fight among economists.

One or more economists — seeking attention and a chance to look clever — say something stupid like well, at least, the rebuilding will be good for the economy.

In response, other economists quote Frederic Bastiat’s Broken Window Fallacyask why we don’t smash everyone’s house to help the economy and lecture us that economic metrics, like GDP, do not take into account the value lost in destruction.

However, I think that both sides of this food fight talk past each other. Silas Barta’s has similar thoughts.

While I agree with the second set of economists, I think they ignore what I think is one key point of the first set of economists argument — ‘slack resources’.

The first set of economists know destruction is bad, but believe that because the economy wasn’t operating at ‘full capacity’, it had slack resources that can now be put to good use in the rebuilding effort. The second set of economists never address this point.

Here’s how I would address the slack resources argument: ‘Slack resources’ is a subjective, incorrect and misleading way to characterize what’s happening in a bad economy. So is the idea of ‘full capacity’.

It looks right-enough that almost nobody questions it, even the second set of economists. Except, maybe, one that I know of (Arnold Kling).

And I can understand why so few people question the ‘slack resources’ hypothesis. When you see a friend who is unemployed and struggling to find work you tend to think of him as a slack resource.

It’s like seeing your kid doing nothing on a Saturday afternoon and you get this strong urge to put him to work. He or she appears to be a slack resource.

It’s natural for us to think — We should be able to put these folks to work! They’re ‘slacking’ off.

But, I believe the ‘slack resources’ characterization is incorrect and misleading. Scratch past the surface you will find more to the story.

Have coffee with that unemployed — slack resource — friend and you find out he has turned down three job offers, because they were for 20% less than what he made at his previous job.

You ask, why not accept the pay cut so you can get back to work? Maybe you’ll get in there, knock their socks off and be back to your old wage in no time.

Well, it turns out he had enough savings and unemployment benefits to allow him to hold out for a job that will pay him his previous wage. Why should I accept less until I absolutely have to (i.e. when I run out of unemployment benefits)?

We find out our friend isn’t a slack resource. Rather, his skills are being re-priced and he doesn’t like it.

I don’t blame him. Nobody likes to have their wages “re-priced” down, but it happens all the time and it happens due to decisions that you and I make.

When one of our favorite Hollywood superstars makes a stinker of a movie that we choose not see, he may have to accept lower pay on the next movie to get studios to hire him. He could say, if only my fans would have supported me and seen that movie. His fans might respond, if only you would have made a movie worth seeing.

The first set of economists in the food fight see a bad economy as having slack resources. But what they truly reveal to me is that they don’t understand what’s really happening — things are being repriced based on the decisions that we make.

This is lack of real understanding of a bad economy is readily apparent when you consider how many barriers to repricing the first set of economists have had a hand in putting in place.

Minimum wage is one such barrier. It’s also the reason why there are so many officially unemployed unskilled workers at the moment. The market clearing price for unskilled labor is below the minimum wage, which is a price floor. Econ 101 teaches us that when the market clearing price is lower than the price floor, we will have a situation where supply (workers) exceeds demand (jobs). That’s exactly what we have.

This is fodder for another post, but it never seems to bother these economists that their favored wage price floor is causing so much unemployment. They’d rather feel sanctimonious about supporting something that seems well-intended than allow the official price of unskilled labor to move below what they have deemed an acceptable level.

Unemployment benefits is another such barrier to repricing. Many people believe that the low amount one receives from unemployment insurance is not enough to prevent them from accepting  work and they may be right if we lived in a simpler world.

But, in this world we have folks who have some savings, working spouses and the ability to take on black and gray market jobs to earn some coin while also receiving unemployment. We also learn in Econ 101 that incentives matter. If I accept an official lower paying job, I lose my unemployment check. Why do that when I can accept an unofficial lower paying job and continue to receive unemployment — or ‘double dip’?

These barriers slow the repricing process and lengthens the ‘bad economy’. They are the reasons why our recessions seem to take longer and longer to recover from.

If our friend didn’t have a free unemployment check that he would lose by accepting an official job, he might accept an official job sooner.

So, the next time you hear an economist talk about slack resources, give some consideration to whether the resource is really slack or whether someone just hasn’t been willing to accept a lower price for that resource and why.

Coming soon…repricing downward is awful, but is it really that awful?

Let it be


Today, Thomas Sowell gives us some historical perspective on the relatively recent assumed government power of trying to help (not necessarily helping) the economy:

For the first 150 years of this country’s existence, the federal government felt no great need to “do something” when the economy turned down. Over that long span of time, the economic downturns were neither as deep nor as long lasting as they have been since the federal government decided that it had to “do something” in the wake of the stock market crash of 1929, which set a new precedent.

One of the last of the “do nothing” presidents was Warren G. Harding. In 1921, under President Harding, unemployment hit 11.7 percent — higher than it has been under President Obama. Harding did nothing to get the economy stimulated.

Far from spending more money to try to “jump start” the economy, President Harding actually reduced government spending, as the tax revenues declined during the economic downturn.

This was not a matter of absent-mindedly neglecting the economy. President Harding deliberately rejected the urging of his own Secretary of Commerce, Herbert Hoover, to intervene.

The 11.7 percent unemployment rate in 1921 fell to 6.7 percent in 1922, and then to 2.4 percent in 1923. It is hard to think of any government intervention in the economy that produced such a sharp and swift reduction in unemployment as was produced by just staying out of the way and letting the economy rebound on its own.

Later, he explains why trying to help is not the same as actually helping and why jobs are not plentiful:

The endless proliferation of anti-business interventions by government, and the sight of more of the same coming over the horizon from Barack Obama’s appointees in the federal bureaucracies, creates the one thing that has long stifled economic activity in countries around the world — uncertainty about what the rules of the game are, and the unpredictability of how specifically those rules will continue to change in a hostile political environment.


Sorry, We’re Out of Money

In Spain, government workers are protesting pay cuts from their broke government. The parasite has consumed its host and is dying a painful death of its own.

Spain is suffering its second recession in four years, with an unemployment rate of more than 24 percent.

That’s always the problem when the parasite doesn’t realize it is a parasite.

Incentives Matter

In the Wall Street Journal today, economist Alan Binder suggests that we should consider extending the already extended 99-week unemployment payouts (extended from a normal of 26 weeks).

If Congress fails to maintain this assistance [i.e. extend the 99-week unemployment payout period], about 1.3 [million] jobless people will lose their benefits at the end of this month. In fact, due to a quirk in the EB formula, some will start losing them even sooner. As the year wears on, that number will rise closer to five million. Isn’t that a serious hole in the safety net?

As I said, extending both the payroll tax cut and the long-term unemployment benefits should be no-brainers under current circumstances.

Yet, Blinder fails to connect the dots in his own column.  Appearing just before those two paragraphs is this one:

In stark contrast with all U.S. experience since the Great Depression, over 42% of today’s unemployed have been jobless for more than 26 weeks. That’s an extraordinarily high number. It means, among other things, that more than 18 million Americans have drawn on the EUC or EB programs since 2008.

Past data and data from other countries show that the unemployed tend to become employed right around the time their unemployment benefits run out.

This is just another version of incentives matter.  Even though most people consider unemployment payouts to be small, many people will do what they can to keep collecting it if they happen to also have a nest egg, severance pay or an off-the-books source of income.  They will also try to hold out for a job that pays them as much as their previous one, even if they have lower paying job options available.  It only pays them to go with the lower paying job when their unemployment benefits run out.

So it’s not surprising, as Blinder points out, that more people have remained unemployed for more than 26 weeks in this recession than in others.  That’s exactly what we’ve encouraged with the unemployment benefits policy.

What is surprising is that an economist like Blinder doesn’t understand that.

Unemployment cycles

It doesn’t surprise me that a bunch of young folks are protesting on Wall Street.  After all, since we’ve crimped our job creation engine — innovation and entrepreneurship — what else do they have to do?  Work?

On another note, I’ve heard several radio show hosts and columnists mention that it seems that more people are coming to understand that government isn’t a wealth creator — it’s just an overhead expense.

I also attribute this to the crimping of the job creation engine.  A lot more folks have more time on their hands to sit and ponder these sorts of things since there isn’t as much to do.

A few years ago when the economy was purring and folks couldn’t keep up with their work demands, who had time to think about the role of government in our lives?  Very few.  And unfortunately, I think that’s one of the very causes that led people to become a bit more careless and vote in Republican and Democrat big government types.  They simply didn’t have the time to think about it.  They were too busy building their prosperity.

Who moved my cheese?

On her blog, Megan McArdle writes in post called, A Tentative Defense of Breaking Windows:

The heart of the argument is this: prolonged unemployment is basically the worst economic event that can happen to a person in America.  Losing your home, declaring bankruptcy, or having your life savings stolen are awful.  But as long as you are working, those things can be replaced–maybe never as good as they were, but certainly adequately.  A lengthy spell of unemployment robs you of social status.  It steals your piece of mind.  It embezzles your accumulated skills and contacts.  It beats your sense of self-worth into a bloody pulp.  And like all crime victims, it leaves you permanently afraid in a way that you never were before.  And that’s if you get a job.  Except that one of the worst parts of being unemployed for a long time is that it gets harder to get another job with each passing month.

Megan seems to overlook the simple solution here.  As several of my grandparents use to tell me, get off your duff and go make yourself useful to someone.

It may not be your ideal job.  It may not pay what you were making before.  It may be temporary and ‘beneath’ you.  And it may lead you into a highly successful career path that you would have never considered.

I can’t remember exactly where I heard this story.  Seems like a radio show like Dave Ramsey or maybe even NPR.  It’s a story about a woman who lost her job.  She went to Home Depot and bought $10 worth of window washing equipment and started knocking on doors offering to wash windows.  Within a couple years she had a window washing company with several hundred thousand dollars a year in sales.

What about those of you who do have a job?  Are you saving an emergency fund?  Are you broadening your skills, taking advantage of your company’s training and education programs and getting varied experiences so that you might be able to transition to something else easier?  Are you managing your expenses so you could live on much less income if you have to take a lower paying job?   What thought have you given to your backup plan?