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Food stamps cause global depression?

November 2nd, 2012

Chicago is about as close to the American heartland as you can get and still be in a major city (the infamous Heartland Institute is located there, for example), but even so, I’d expect a professor at the University of Chicago to be aware that the USA is not the only country in the world. That’s not true, apparently, of Casey Mulligan, who claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ” greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

Mulligan’s claims about US policy are dubious at best (see over fold), but there’s a much more critical problem with his argument. If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries? Did Iceland expand its food stamp program? Does Estonia pay unemployment bonuses? Sadly, no. And while many countries adopted Keynesian policies in the immediate aftermath of the Wall Street meltdown, others did not, and most have now switched to the disastrous policy of austerity. An even clearer demonstration is given by the Great Depression, where nearly all governments pursued austerity policies after 1929 (Mark Blyth’s soon-to-appear Austerity: The History of a Dangerous Idea tells the story)>

This isn’t just a problem for Mulligan. The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).

Responding more specifically to Mulligan’s claims, his suggested mechanisms don’t fit the data. As is usual in a recession, the period of eligibility for unemployment insurance was extended to a maximum of 99 weeks in the aftermath of the financial crisis. However, this extension has gradually been withdrawn, and an additional Federal benefit is due to expire at the end of this year. Yet the employment-population ratio has remained at low levels not seen for decades (the increase over the late 20th century reflects women’s entry to the workforce). Mulligan could still claim vindication if employment were to jump dramatically in 2013, but it’s notable that he predicts nothing of the kind.

As for food stamps, the expansion in the number of recipients is not due to changes in policy but to the fact that, thanks to mass unemployment, many more people are eligible under existing rules.

  1. Sheila Newman
    November 2nd, 2012 at 18:10 | #1

    It seems to me that universities are more and more the mouth-pieces of corporate growth policies and have less and less to do with real information, theories or science. So it does not surprise me to hear another inane and value-biased economic pronouncement issuing from one. What is really scary is that such comments are given unquestioned authority by the mainstream media, and they are getting more and more anti-social.

  2. Robert (not from UK)
    November 2nd, 2012 at 18:27 | #2

    Oops! A typo: “jsut” should be “just”.

  3. Jim Rose
    November 2nd, 2012 at 19:05 | #3

    Did unemployment move in the same way, and at the same time, in many different countries? Australia might be a counter-example? NZ? Canada?

    One-third of EU unemployed are Spanish. Is Spanish aggregate demand especially deficient? Irish unemployment is higher and relates to foolish choices to spend up big (a budget deficit of 29% of GDP) to bail-out bond holders to whom the Irish government had no obligations.

    Lee Ohanian in The Economic Crisis from a Neoclassical Perspective finds that the great recession differs substantially from other post-war U.S. recessions, and also from the 2008-2009 recessions in other countries.
    • Lower labor input account for virtually all of the decline in U.S. incomes and output in the U.S while lower productivity accounts for much of other U.S. recessions and for the 2007-2009 recession in other countries.
    • the decline in per capita employment is much larger in the United States (6.7 percent) than in the other countries (2.0 percent, on average).
    • despite the much smaller employment decline in the six countries, per capita output fell more there than it did in the United States (8.5 percent versus 7.2 percent), indicating that the nations experienced much different productivity changes during the recession.
    • Investment fell over twice as much in the US as in the other nations, 33.5 percent versus 16.4 percent.

    Given the roughly similar nature of the financial crisis globally, these differences bear scrutiny in efforts to understand the Great Recession.

    see http://www.econ.washington.edu/news/millimansl.pdf where Lucas explains that Obama’s policies have caused the US to deviate permanently to a lower, European-style real GDP growth path. the slow recovery was caused by adverse supply-side polices.

    Lucas’ key point is the financial panic was over by end of 2008 – but it was too late to prevent deep spending declines in 2008-4 and 2009-1; and there is world of difference between two quarters of production declines and four years!

    The economic policies intended to help manage the crisis in 2008 and after actually deepened the recession by increasing uncertainty and distorting incentives

  4. Ikonoclast
    November 2nd, 2012 at 19:56 | #4

    @Jim Rose

    Jim, you seem very concerned about distorting incentives. Are you for or against fossil fuel subsidies and corporate welfare?

    If you are an Australian, are you for or against negative gearing?

    For reference;

    “Australian tax treatment of negative gearing is as follows.

    1. Interest on an investment loan for an income producing purpose is fully deductible, even if the income falls short of the interest. Any shortfall ends up offsetting income from other sources, such as the wage and salary income of the investor.
    2. Ongoing maintenance and small expenses are similarly fully deductible.
    3. Property fixtures and fittings are treated as plant, and a deduction for depreciation is allowed, based on effective life. When later sold the difference between actual proceeds and the written-down value becomes income, or further deduction.
    4. Capital works (buildings or major additions, constructed after 1987 or certain other dates) receive a 2.5% per annum capital works deduction (or 4% in certain circumstances). The percentage is on the initial cost (or an estimate), until exhausted. The investor’s cost base for capital gains tax purposes is reduced by the amount claimed.
    5. On sale, capital gains tax is payable on proceeds less cost base (and excluding items treated as plant above). A net capital gain is taxed as income, but if the asset was held for 1 year or more than the gain is first discounted by 50% for an individual, or 33⅓% for a superannuation fund. (This discount commenced in 1999, prior to that a cost base indexing and a stretching of marginal rates applied instead.)” – Wikipedia.

  5. Jim Rose
    November 2nd, 2012 at 20:19 | #5

    much of the same ground is covered at http://johnhcochrane.blogspot.co.nz/2012/11/debate-with-goolsbee.html about a debate on economic policy issues in the current election between Austan Goolsbee and John cochrane

  6. Hermit
    November 2nd, 2012 at 22:20 | #6

    Recently some 46m Americans were on food stamps with the stigma (ie ‘white trash’) having long waned. No doubt the Republicans will get a high vote even if they just fall short. It strikes me that their supporters parallel the Alan Jones talkback radio audience. They want to believe in the continuation of the prosperous times that gave them a good lifestyle, now seemingly slipping away. Somehow the GOP will simultaneously cut taxes for some and remove the indignity of food stamps for others. Details to be worked out later. After this election I suspect as elsewhere (notably the UK) the political centre in the US will shift to the left.

  7. PeakVT
    November 3rd, 2012 at 00:45 | #7

    Jim Rose :
    The economic policies intended to help manage the crisis in 2008 and after actually deepened the recession by increasing uncertainty and distorting incentives

    That’s garbage, and so is that Powerpoint by Lucas. He says, “[In 1934] Yet full recovery was still 7 years away: Why? Monetary theory no help here.” Really, there could hardly be a more hackish presentation of the GD in the US. 1934-6 were years of extraordinarily high growth that were reversed by the foolish attempt to balanced the budget in 1937, leading to a recession in 1937. Growth resumed in 1939 when the budget trimming effort was halted, and then exploded in the 1940s when the massive government deficit spending program called WWII really took off. So while “monetary theory” may be of no help, the whole episode is very well explained by another, competing theory. Only a hack could completely wave it away.

    Similarly, even though the financial panic may have been over in early 2009, that doesn’t mean the overhang of debt was gone, or that the conditions that drove growth in the 00s in the US had returned. Unless you can explain why the US would suddenly return to under-saving and over-building by a couple of percent of GDP, or identify some new growth driver that would have replaced it except for some specific policy implemented by the Obama administration, you are simply parroting right-wing talking points.

  8. Katz
    November 3rd, 2012 at 07:52 | #8

    Jim Rose’s Lucas fingers government as the culprit for the Great Recession:

    Believe it is more accurate to say that the problem is government is doing too much

    Yet nowhere in Lucas’ talking points is there any indication of the alleged meddling of government. Lucas shares this failure with Mulligan, who bases his critique on a hypothetical model of how the food stamp program is “supposed” to influence workforce decisions.

    Like Lucas, Mulligan provides no relevant empirical evidence. Given the choice of challenging or cherishing their pet theories, they choose fantasy over facts.

  9. Ernestine Gross
    November 3rd, 2012 at 07:59 | #9

    Unemployment arises from labor market “distortions”. Well yes. The problem is that, as a consequence of some people extacting too much income (expropriation, relative to the theoretical model of competitive markets), other people become unemployed. I gather this is not what the Chicago boys have in mind.

  10. Ikonoclast
    November 3rd, 2012 at 09:07 | #10

    Will we ever again see good economic policy in the West? I mean policies that result in;

    1. Full employment (about 2% frictional unemployment).
    2. No under-employment or discouraged workers leaving the labour force.
    3. Low inflation.
    4. Low or no industrial unrest.
    5. Adequate returns on labour (living wages so wage earners require no top-up welfare.)
    6. Adequate returns on capital (to enable productive investment).
    7. No asset bubbles and no excess booms or crashes (general moderation of the business cycle.)

    Is it possible to get economic settings in the current system which achieve all these points? In other words, can all these goals be achieved simultaneously? I think, empirically, the answer is yes. All these points were achieved in the years in Australia when Keynesian policies dominated in the 1950s and 1960s; the so-called Golden Years of Capitalism and the Keynesian Consensus.

    The question is why have we failed since? Either conditions changed and Keynesianism no longer works for some reason or economic ideology changed and the Keynesian Consensus and Keynesian policy, though successful, were abandoned.

    Wikepedia notes: “The displacement of Keynesian thinking was driven by those who leaned towards purer free market policies, rather than the mixed economy which require a significant role for government intervention. Their motivations included a dislike of large governments which they saw as prone to interfere excessively in the lives of their citizens; an intellectual preference for Classical or Neoclassical economics and related schools; or in some cases a belief that their individual interests were best served by promoting a limited role for government. Efforts against Keynesianism took place on three fronts – in the academic world, in politics, and in the wider world of business and public opinion.”

    Basically, the abandonment of three things (Keynesian economics, a significant role for government and a decidedly mixed economy) have led to most of our subsequent problems on the economic front. What are our chances of reversing this trend? I would say very poor. Neoclassical political economy dominates on all fronts; in business, in government, in academia and in public debate. The real problem is there is now little time left to reverse the destructive trend. Soon our economies and environment will be too wrecked by the current maladaptive system. Recovery may not be possible if real change is delayed much longer.

    If anything strikes me about our society it is not the “change” that everyone carps on about, it is the inability to change. We have been stuck for fifty years in the straightjacket and noose of neoclassical political economy which is binding us up and choking out all possibilty of saving changes.

  11. Ikonoclast
    November 3rd, 2012 at 09:32 | #11

    The above post (if it creates any debate at all) will probably provoke debate about 70s stagflation. That would have to go to a sandpit I would say. I am certainly keen to have a debate about stagflation and how (I think) Keynesianism and moderate government intervention can prevent stagflation occurring. (Meaning one of the common definitions of stagflation, namely high inflation and high unemployment.)

  12. Katz
    November 3rd, 2012 at 09:57 | #12

    A return to effective Keynesianism is impossible with a return to fixed exchange rates.

    I cannot imagine nation states accepting that restriction in the foreseeable future.

  13. Katz
    November 3rd, 2012 at 10:13 | #13

    Err … that is WITHOUT. Sorry.

  14. Ikonoclast
    November 3rd, 2012 at 10:51 | #14

    I don’t see how floating exchange rates prevent Keynesian policies. But please enlighten me if I am missing the reasons.

  15. Jim Rose
    November 3rd, 2012 at 10:52 | #15

    @Katz you say that nowhere in Lucas’ talking points is there any indication of the alleged meddling of government. Lucas slide 36 has the following:
    • Believe it is more accurate to say that the problem is government is doing too much
    • Again, I see analogies to the U.S. of the 1930s
    • Likelihood of much higher taxes, focused on the “rich”
    • Medical legislation that promises large increase in role of government
    • Financial legislation that assigns vast, poorly-defined responsibilitiesto Fed, others
    • Are these conditions that foster a revival in business investment, consumer spending

  16. MG42
    November 3rd, 2012 at 10:57 | #16

    The question for the free-marketeers remains: if governments are such an impediment on the workings of the free market, then why was the period with the most extensive government involvement the most prosperous? Likewise, the results of the past 30 years of neo-liberalism are becoming obvious: increased wealth concentration and large deficits without any extraordinary long-term economic growth or decreases in unemployment.

    However, I feel that it is almost impossible to deliberately return to 2% unemployment and 4% economic growth due to several factors. One is the far more advanced globalisation of capital and transport/logistics technology. Another is greater industrialisation and living standards in parts of India and China which causes downward wage pressures on both the skilled and unskilled domestic workforce. No, another golden age will most likely occur from some black swan event, such as a plague or major war (God forbid).

  17. Katz
    November 3rd, 2012 at 11:25 | #17

    Lucas makes no mention of the fact that a far more pore tent reason why businesses have not invested in expansion is that US banks have refused to len

    However, the most significant drag on the economy is the near absence of credit growth. Usually, credit and GDP growth lead to a blossoming of small businesses. However, this time, most of whatever credit growth emerges is monopolized by banks, thereby depriving small businesses of the financial resources they need to grow, thrive, and create jobs.

    So the tragic irony is that the very banks that led us into the current economic crisis, the very banks that received billions of dollars in bailout funds to keep them from failing – those banks are now hoarding most of the Fed’s increase in credit supply in order to improve their balance sheets and keep government regulators at bay. The Federal Reserve is flooding the system with enormous amounts of money, and has vowed to keep interest rates historically low for the next two years – but none of that means much to our economy unless that money is made available to small businesses.

    http://www.examiner.com/slideshow/unwilling-banks-hampering-economic-recovery#slide=39738216

  18. Jim Rose
    November 3rd, 2012 at 11:29 | #18

    see http://caseymulligan.blogspot.co.nz/search/label/list%3A%20employment-reducing%20policies
    Means-tested health insurance benefits
    Extra taxes for multi-national corporations
    mandating the employers with large payrolls provide health insurance, but that employers with small payrolls do not,
    penalizing employers for providing the type of health insurance they did in the past,
    minimum wage hike
    means-tested mortgage modification (presenting millions of workers with implicit tax rates in excess of 100% (sic)),
    means-tested new home buyer credit,
    mean-tested student loan modification,
    unemployment insurance extensions,
    state income tax hikes,
    IRS means-tested enforcement of prior tax debts,
    planning for new-hiring-tax-credits,
    marginal federal tax rate hikes on the “rich”!

    John taylor would add
    - Deviation from the monetary policy of the Great Moderation, 2003-2005
    – Term auction facility (TAF), created by Federal Reserve, 2007
    – U.S. discretionary fiscal stimulus, 2008
    – On-again/off-again interventions of financial firms by the Fed, 2008
    – Money market mutual fund liquidity facility, 2008
    – Commercial paper funding facility, 2008
    – U.S. discretionary fiscal stimulus, 2009
    – G-20 fiscal stimulus agreement, 2009
    – MBS purchase program of the Fed, 2009-2010
    – Trillion dollar European rescue package, 2010
    – The ECB joining the rescue package by buying distressed debt, 2010
    – The Fed joining the rescue package by making swap loans, 2010

  19. Katz
    November 3rd, 2012 at 11:36 | #19

    Floating exchange rates imply transportability of capital across borders and the ability to hedge against risk, including sovereign risk. Fiscal deficits, and the dangers of inflation implied in them, can provoke capital flight, which serves to depress economic activity — a pro-cyclic phenomenon that cancels the anti-cyclic intent of fiscal deficits.

  20. Katz
    November 3rd, 2012 at 11:44 | #20

    But as is quite clear, businesses are eager to borrow but banks are unwilling/unable to lend.

    Lucas and Mulligan assume that businesses have given up ambitions to expand. Empirical evidence refutes that ideologically-driven fantasy.

  21. BilB
    November 3rd, 2012 at 11:45 | #21

    You know that you are in trouble when people attempt to solve an economic imbalance with ideologically derived solutions. This the same voodoo type thinking that people who know nothing about engines use to try to get their car going again when it has failed mid journey. “wiggle those wires, that worked last time”.

    If an economy has high unemployment then there are a set of things that have happened to create the situation.

    1] Manufacturing/Agricultural (business) throughput/profitability has declined
    2] Demand for locally produced goods has declined
    3] Demand for services has changed
    4] Supply of materials has altered/failed
    5] Costs of resources physical and/or financial have changed
    6] Commercial structures have failed (banks)
    7] Government spending has changed suddenly
    8] Rampant corruption/illegal attributes
    9] Other. Disasters, Climate change,…

    It is a finite set of elements, and every economic crisis will have its own specific combination of influences. The problem that the western economies face is that they are locked into a “good times” set of preconceived ideologies which offer an insufficiently small number of economic instruments with which to react to change.

    It is extremely important to recognise this and make intelligent structural changes before Robert Rapier’s oil demand driven “Long Recession” sets in.

    The two principle causes of the current set of economic woes are 1 and 5, with 1 being the primary driver. 3 contributes but is reactive to all other influences. It is crucial to understand the business throughput issue as it is this element that is the damaged by ideological constraints. It is also the element that creates/sheds (along with services) the most employment. The global free trade ideology has its benefits, but when the economy turns sour it serves to extend the damage of unemployment. The GFC was set up by a complex of 5,6,8,and 9 all interacting, but the consequence is unemployment.

    If you have a large body of unemployed people, this has negatives and positives. The negative is that you need to either support these people until they are self supporting, or you have to be able to withstand the political pressure that would arrive if you let them starve to death, (the libertarian solution). The positive is that a body of underemployment is also an underutilised productive resource. The task of getting these people back to self support status will depend on how rigidly the economy is clamped by ideologically static economic structures. The trillion dollar question is how to utilise that resource.

    Clearly such a distresssed economy has an oversupply/overstocking of various commodities, and this will, in our free trade world, be fed from more competitive economies. When local employment declines rapidly there is insufficient time to deploy the ideologically based solution of “increasing productivity”. There needs to be a consumption side trimming mechanism for the economy to work in co-operation with the investment side interest rate mechanism.

    To my thinking, as I have put forward a number of times is that (national) global variable duty for all goods and services to operate in the 0% to 5% reacting to the national unemployemnt level would provide that trimming mechanism providing a device that adjusts productivity competitiveness in the short term while providing a fiscal flow to allow government to act decisively in promoting appropriate corrective change.

    The are an ever increasing number of high impact external influences that are beyond the corrective scope of current ideological platforms, platforms that have not evolved at the same rate as our Global Economy, our Global Population, or our Changing Environment.

    We need a new class of Economic Technician to problem solve our ever more complex and frequent economic crises. More of the same will not work.

  22. BilB
    November 3rd, 2012 at 12:04 | #22

    Out of interest I am using a thinking model of a self sufficient village I call TenTown (ten adult residents, no kids) to see how employment is created and resources are rearranged when tenTown moves to ElevenTown with the arrival of a visitor. I’m sure that such models exist, this is mine for the moment. There is a lot said about “creating new jobs”, but what does that really entail.

  23. SJ
    November 3rd, 2012 at 22:55 | #23

    Katz says: “A return to effective Keynesianism is impossible with a return to fixed exchange rates. I cannot imagine nation states accepting that restriction in the foreseeable future.”

    This isn’t correct. The gold standard of meant a fixed exchange rate. During the 1930s, the countries that left the gold standard earliest had the quickest recoveries.

    Y

  24. SJ
    November 3rd, 2012 at 23:09 | #24

    Katz goes on to say: “Fiscal deficits, and the dangers of inflation implied in them, can provoke capital flight, which serves to depress economic activity — a pro-cyclic phenomenon that cancels the anti-cyclic intent of fiscal deficits.”

    There’s some truth in this, but only for countries that are forced to borrow in a currency they don’t control. So this applies to say, Greece, at the moment, or any number of Asian countries in the 1990s.

    “But as is quite clear, businesses are eager to borrow but banks are unwilling/unable to lend.”

    There’s no truth in this assertion in 2012. It may have been true in 2008, but not anymore. Who wants to borrow money to expand business in say, Spain? Nobody, that’s who. Unemployment is at about 25%. In aggregate, people don’t have enough money to spend to support expansion of new business.

  25. November 3rd, 2012 at 23:36 | #25

    When I was in the States in 2008 I stayed with a friend. Her father was staying with her as well. He had recently got a disability pension, after years on food stamps. He told me “you cannot buy toilet paper with food stamps” The humiliation of having to find discarded newspapers to wipe himself was keen in his mind.

    The idea that foodstamps represent disincentive to find work is something that could only be believed by someone who not only has never been on them, but has never met anyone who has been on them.

    BTW “One-third of EU unemployed are Spanish. Is Spanish aggregate demand especially deficient?” I think it is pretty clear that demand is especially deficient in Spain, thanks to the collapse of the construction industry after a housing boom burst and the intense austerity policies being adopted.

    Moreover, just a note on the accuracy of our neoclassical friends. Spain has 5.7 million unemployed. The EU has over 25 million. You do the math.

  26. November 4th, 2012 at 00:15 | #26

    @Stephen Luntz

    It wouldn’t be at all incongruous with their usual approach to be suggesting, slyly in a nudge/wink kind of way, that there must be another few million unemployed Spaniards splashed around the other EU countries just being, you know – unemployed.

    Neocons are racists. Not viscerally, but just functionally – they need a “them” to justify their concept of an “us”.

    If it isn’t race it’s something else. It’s how they roll.

  27. Katz
    November 4th, 2012 at 06:31 | #27

    SJ,

    1. the subject was Keynesianism, not recovery from the GD. You also quoted my first comment, which suffered from a typo that exactly reversed my intended meaning.

    2. If I intended to discuss Spain, I would have mentioned Spain. Quite evidently, my comments applied only to the US.

  28. rog
    November 4th, 2012 at 08:06 | #28

    Mulligan adopts the strange construction “he and I” when responding to Krugman. Despite all this he seems unable to adjust his hypothesis that safety nets remove the incentive to work.

    http://caseymulligan.blogspot.co.nz/2012/11/we-are-supposed-to-trust-them-with.html

  29. Jim Rose
    November 4th, 2012 at 08:48 | #29

    megan #26, see http://crookedtimber.org/2012/04/27/classical-economics-and-recession-in-many-countries-wonkish/ where I discuss why Spanish unemployment is so high.

    “The current discontents in the euro-zone show that overreactions by governments can prolong and deepen the downturn, turning it into a depression.

    One-third of EU unemployed are now in Spain: Cahuc et al. estimated that Spanish unemployment would be 40% lower if Spain adopted the less strict French laws!”

    you seem to be a member of what Rushdie called the outrage industry.

  30. Jim Rose
    November 4th, 2012 at 10:13 | #30

    @rog Inter-war UK unemployment illustrates the power of the social safety net to push the natural unemployment rate into double digits.

    Cole & Ohanian (2002) found that the labor input in the UK was 20 percent below what it was prior to World War I for the entire interwar period. A unique feature of the inter-war British Depression is that it began in 1920.

    Cole & Ohanian and Benjamin and Kochin (1979, 1982) concluded that generous unemployment benefits, in conjunction with on the interaction between these benefits, the regional concentration of declining industries, and government policies that raised the cost of relocation were the probable reasons for the low labor input.

    Inter-war UK unemployment benefits may have been roughly comparable to the market wage of displaced adult male workers. Many of those covered were manual labourers with a high disutility of working.

    Benjamin and Kochin showed that juveniles – who received lower unemployment benefits – had much lower unemployment rates. Unemployment rates among married women fell substantially after the 1931 Anomalies Legislation significantly raised married women’s unemployment insurance contributory requirements. Was the deficient aggregate demand for adults males only?

    UK unemployment benefits could be collected indefinitely and was payable for unemployment spells as short as one day! There was a recession every Monday morning in inter-war UK economy lasting well into the afternoon because many claimed the dole for a long weekend. Can deficient aggregate demand last for one day?

  31. BilB
    November 4th, 2012 at 10:38 | #31

    “sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs”

    Is this what the “American Dream” has become?? Food stamps? I don’t think so. America is a diverse place with such a broad interpretation “the good life”, but I doubt that anyone thinks of have tokens for food to feed themselves and their kids is…living it up. You have to go to America and walk around to see the desperation in peoples faces to understand how far from good and secure the US is. In a recent two day trip to North Carolina twice I had people ask me in the street if I knew where the job centre was. And I was only on the street walking around for three hours at most.

    The US’s problem is that the bottom is so close to the top for most people. The living safety margin is so thin.

    But I cringe when I hear people talk about road and bridge building “to get people back to work”. These things are capital and material intensive, you have to spend a huge amount of money to employ just a handful of people.

    So I’ve been contemplating which industries would you stimulate for best effect. My front runner so far is solar water heating. A national campaign to put solar water heaters on every roof in America, although still a little material intensive, has several layers of benefit. With the proviso that the units are manufactured in the US manufacturing gets a very large boost. Installation personnel are the larger group to benefit as these units don’t just hook up to hot water cylinders, they feed space heating systems as well.

    The down stream benefits are lower energy bills, lower CO2 emissions, effective decrease in imported energy as water heating share of coal seam gas can be used for other industries, the benefits are of greatest value to the poorer end of the community.

    Another stimulous area that goes down to the public level very well is for the creation of cycleways as a national campaign. Coupled with that is the preperation for an ebike boom. When petrol in the us hits $5 per gallon the very unispiring ebike sales are projected to explode.

    As an aside.
    On gun control I’ve decided that controlling guns is not necessarily the right approach. Control the ammunition instead. One bullet per year per gun. That would help people focus on using them more responsibly.

    Back to topic

    18 million people receiving food stamps, costing 80 billion dollars per year. Not really the economy busting issue that is implied particularly when your realise that a lot of these people are from cyclone Katrina, tornado devastated areas, soon cyclone Sandy, drought affected areas, GFC corruption fallout, etc. It is not all about lazy people as republicans would like the country to believe.

  32. Fran Barlow
    November 4th, 2012 at 16:00 | #32

    OK … 31 posts and nobody yet has mentioned the racial connotation of angst over food stamps in the US. Saying food stamps cause depression is one step back from blaming the poor and especially blacks and Latinos for America’s woes.

    The idea of calling Obama a “food stamp President” apparently came from Gingrich.

  33. Jim Rose
    November 4th, 2012 at 18:28 | #33

    “If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries?”

    but see http://www.oecd.org/std/labourstatistics/HUR_NR10e12.pdf showing that unemployment rates are moving in different directions now because poorer institutions in the EU. The overreactions by governments can prolong and deepen the downturn, turning it into a depression.

  34. SqueakyRat
    November 4th, 2012 at 19:28 | #34

    @Sheila Newman
    Sheila, econ departments are a rather special case. All is not well in academia, but not because it’s all infected with that particular kind of intellectual corruption.

  35. SJ
    November 4th, 2012 at 20:03 | #35

    Katz Says: “1. the subject was Keynesianism, not recovery from the GD. You also quoted my first comment, which suffered from a typo that exactly reversed my intended meaning.

    2. If I intended to discuss Spain, I would have mentioned Spain. Quite evidently, my comments applied only to the US.”

    I can see that you don’t understand any of this. That’s OK. It’s difficult stuff, and I meant no disrespect. I didn’t want to leave Ikonoclast or others thinking that there was some hidden depth behind what you were saying.

  36. Jim Rose
    November 4th, 2012 at 21:02 | #36

    @SqueakyRat there have been many studies of political views of academics. Using voter registrations and faculty web pages, Dan Klein found that:
    • Academic social scientists overwhelmingly vote Democratic, and the Democratic hegemony has increased significantly since 1970.

    • Of the fields sampled, anthropology and sociology are the most lopsided, with Democratic to Republican ratios upwards of 20:1, and economics is the least lopsided, about 3:1.

    • Among social-science and humanities professors up through age 70, the overall Democrat: Republican ratio is probably about 8:1.

    These findings are generally in line with the previous studies and those in Australia.

    The left-wing bias of universities is no surprise in light of Hayek’s analysis of intellectuals in light of opportunities available to people of varying talents:
    • intelligent people who favour the market tend to find opportunities for professional and financial success in the business or professional world; and
    • Those who are highly intelligent but ill-disposed toward the market are more likely to choose an academic career.

  37. BilB
    November 5th, 2012 at 04:03 | #37

    I was trying to figure out what Sheila was leading to so had to read Casey Mulligan’s original article.

    There has got to be some new Belgian style “Great Forgetting” going on in the non Keynsian economics camp for Mulligan to be mystified over the loss of jobs in all sectors in the 2007 to 2009 period. The GFC affected every business, not just the housing sector. With the crash my local council here, half a world away, in Australia lost its entire worker’s superannuation fund over night and had to shed jobs, suspend construction programs, and reduce services. Australia did not need to issue food stamps, but that is because we have a comprehensive social welfare system, unlike the US.

    Sheila, I think, is over reacting in claiming a trend based on Mulligan, as Squeaky Rat points out. Mulligan is a distant dot, a Cato aberation, and a point in case for a discussion that was going on here about academic publication strategies…too many poorly thought out or fewer major works. Its the “too many” in Mulligans case looking at his Cato Unbound profile, running the risk of being a has been before he has begun. And as his article appears to be a glimpse of his coming major work, prepare to be underwhelmed.

    And all rounded off with Jim Rose’s statistical piece that demonstrates that knowledge has consequences. Understanding of social interaction produces Democrats for instance. Engineers with their quantitative knowledge of loads and material strengths build strong and ugly, Artists build decorative and delicate, and Architects mix it up to build Blerrh!

  38. rog
    November 5th, 2012 at 05:20 | #38

    @Jim Rose Another way to look at it Jim is that right wingers are more stupid than left wingers and there seems to be an abundance of evidence supporting that hypothesis http://pss.sagepub.com/content/early/2012/01/04/0956797611421206.abstract

  39. rog
    November 5th, 2012 at 05:21 | #39

    Another way to look at it Jim is that right wingers are more stupid than left wingers and there seems to be an abundance of evidence supporting that hypothesis http://pss.sagepub.com/content/early/2012/01/04/0956797611421206.abstract

  40. Jim Rose
    November 5th, 2012 at 05:44 | #40

    @rog Rog, Voting to the Left used to be strongly correlated with a lack of education i.e. being a member of the working class.

    I will leave it to Fran Barlow to explain how working class racism and support for the White Australia policy were policies that were not supported by the Left because the Labor Party was not a left-wing party.

    These days, about half the electorate are swinging voters, people’s vote more conservatively with age, and women change their voting patterns much more than do men such as when they marry and divorce. This variation would imply that cognitive abilities are rather unstable – too unstable to be a credible hypothesis.

  41. rog
    November 5th, 2012 at 06:14 | #41

    @Jim Rose Lack of education does not = lack of intelligence.

    For many lack of education = lack of opportunity.

  42. Julie Thomas
    November 5th, 2012 at 07:14 | #42

    Yes Jim Rose that was very ‘stupid’ of you to conflate lack of intelligence with lack of education.

    Why did you do that? Are you stupid or are you simply motivated to protect your own ‘cognitions’? You are happy to use any ‘weapon’ to ‘defeat’ an ‘opponent’? Never mind honesty and integrity?

    You say “This variation would imply that cognitive abilities are rather unstable – too unstable to be a credible hypothesis.”

    A credible hypothesis for what? You want a hypothesis that explains why some people hang on to discredited theories and ideas?

    It is called ‘motivated cognition’ and we all do it. If you are interested, this is an interesting site that attempts to understand climate change tribalism and discusses the possible explanations.

    http://www.culturalcognition.net/blog/2012/10/29/the-science-communication-problem-one-good-explanation-four.html

    I agree that it is not that the Republican or reactionary Brain is more stupid than the Progressive Brain. It seems to be more the case that reactionary ideas ‘make’ the brain stupid, because you need to hunker down and protect your ‘self’ from the criticism of your world view, whereas progressive brains, because they are motived to seek out new ideas and explanations, are more able to develop and change without fearing change.

  43. Tom
    November 5th, 2012 at 09:46 | #43

    Political viewpoint have shifted very significantly over the decades from WWII, anyone whether if they believe by heart or not claims either the current ALP or the Democrats being a leftist party simply have no understanding what leftist believe in.

    An easy demonstration of the change in political viewpoint is here:
    http://economistsview.typepad.com/economistsview/2012/10/does-taxing-the-wealthy-hurt-growth.html

    As noted in the empirical study itself, the US had a top marginal rate of 94% post war throughout the Golden Age of Capitalism which starts dropping to 91% in 1963. The average tax as a % of income paid by the top quintile is at average 60% – 70%+.

    If you used the above statistics today and ask anyone which country do you think this is, most likely the answer would be the Scandinavians or “Communist China or North Korea” (only from those who have no idea about China and North Korea).

    However, if I’m not mistaken, the US have never thought of themselves as a “socialist” country even with economic structure as above for more than 2 decades. (In my opinion), any commenter here might note in today’s world, not only taxation in the US significantly lower compared to that era, any sign of increase in even just discretionary government spending (crisis response stimulus programs) will be accused of “socialism”. This after the fact that federal level employment was lower than pre-crisis levels (Bush era), government investment as a % GDP falls to lowest level (about 2-3%) post WWII, there is no signs of any nationalisation of corporations, and Obama (in my opinion) don’t seem to be keen on increasing tax rates.

    It is no wonder a number of notable intellectuals (such as Solow) finds that politics have been shifted to one side too much over the decades. In today’s standard of “socialism”, perhaps almost all OECD country were a bunch of Communists who have managed over 2-3 decades of economic boom post WWII (unless of course, if you are someone who believe in something like, the all of (now known as) OECDs statistics bureau were engaging in some conspircy theory).

  44. Katz
    November 5th, 2012 at 11:22 | #44

    I can see that you don’t understand any of this. That’s OK. It’s difficult stuff, and I meant no disrespect. I didn’t want to leave Ikonoclast or others thinking that there was some hidden depth behind what you were saying.

    Shorter SJ: Rudeness is an excellent substitute for relevance and knowledge.

  45. Ernestine Gross
    November 5th, 2012 at 14:34 | #45

    Like BilB, I also read up a little on Casey Mulligan, Professor in Economics (not of Economics) at Chicago.

    Casey Mulligan, like many macro-economists, does not acknowledge Finance and the financial industry. I can follow his argument in http://economix.blogs.nytimes.com/2012/10/31/a-keynesian-blind-spot/, if I assume the global financial crisis did not happen.

    I understand the global financial crisis did not happen, in terms of dire consequences, for those who caused it. The dire consequences affect those who get food stamps or other assistance. In terms of reality, Professor Mulligan’s theorising is uninteresting.

  46. Tom
    November 5th, 2012 at 15:31 | #46

    @Ernestine Gross

    Actually, in the models the New Classicals use, there is no such thing as a Global Financial Crisis. As all markets in equilibrium at all times, the GFC simply represents an adjustment in asset prices.

    For example if you look at this interview with Eugene Fama (a prominent New Classical economist who developed the Efficient Market Hypothesis), he has pretty much denied the GFC start from the financial market
    http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html

    Note here, Eugene Fama didn’t even know the Subprime loans had a “honeymoon period” (a limited period with lower interest rates) and he didn’t take into account of the Mortgage Backed Securities role in the GFC.

    Indeed in my opinion, New Classical (from rational expectations and the EMH) as well as Neo-Keynesians don’t place much emphasis on the financial market. If you want a model that does look into the financial market, there is no other theory better than Minsky’s Financial Instability Hypothesis.

  47. Ernestine Gross
    November 5th, 2012 at 17:22 | #47

    @Tom

    Minsky, well, yes. But Radner’s work in the 1970s gave a pretty good insight as to why financial markets cause difficulties, relative to the Arrow-Debreu model, in a private ownership economy with a sequence of commodity and financial markets (ie a little more realistic).

    Won’t I ever be allowed to forget about Eugene Fama? With due respect, I won’t read anything by Fama anymore.

  48. Jim Rose
    November 5th, 2012 at 18:45 | #48

    @Julie Thomas if You want a hypothesis that explains why some people hang on to discredited theories and ideas, look at “Political Pilgrims: Western Intellectuals in Search of the Good Society” and “The end of commitment:
    intellectuals, revolutionaries, and political morality” by Paul Hollander

    these books are about how cultural and religious leaders from the West, including familiar names, visited the Soviet Union, China, Cuba, and other communist countries, and told the most appalling lies to flatter their hosts and express their contempt for Western society.

    In spite of massive evidence, these political pilgrims never waver in their loyalty to failed, left-wing ideals. Isn’t one of these in the Senate?

    Those that finally rejected genocidal utopianism has much courage as it involved a complete break with old friends and ejection from a socio-political subculture.

  49. Katz
    November 5th, 2012 at 18:50 | #49

    Yes, I’m willing to stipulate that neoliberals and Stalinists suffer from similar intellectual infirmities.

  50. Jim Rose
    November 5th, 2012 at 18:55 | #50

    @Tom maybe you should reconsider your love affair with the Menzies era. Andrew Leigh and others found that in a panel of 12 developed nations observed for between 22 and 85 years, a one percentage point rise in the top decile’s income share after 1960 is associated with a statistically significant 0.12 point rise in GDP growth in the following year. see “Do Rising Top Incomes Lift All Boats?”

    If the increase in inequality is permanent, the increase in growth appears to be permanent, but takes 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of income.

  51. Jim Rose
    November 5th, 2012 at 18:58 | #51

    @Katz what is your definition of a neoliberal?

    In Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan, Taylor C. Boas & Jordan Gans-Morse look to find anyone who self-identified as a neoliberal. They did not uncover a single contemporary instance in which an author used the term self-descriptively, and only one—an article by New York Times columnist Thomas Friedman (1999)—in which it was applied to the author’s own policy recommendations.

  52. Katz
    November 5th, 2012 at 19:16 | #52

    I doubt that many have called themselves totalitarians either.

    That doesn’t mean that they never existed.

  53. SJ
    November 5th, 2012 at 19:46 | #53

    “@Tom maybe you should reconsider your love affair with the Menzies era. Andrew Leigh and others found that in a panel of 12 developed nations observed for between 22 and 85 years, a one percentage point rise in the top decile’s income share after 1960 is associated with a statistically significant 0.12 point rise in GDP growth in the following year. see “Do Rising Top Incomes Lift All Boats?”

    If the increase in inequality is permanent, the increase in growth appears to be permanent, but takes 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of income.”

    If I posted this, it would rightly be interpreted as a joke – surely economists know that correlation does not imply causation.

    However, if it’s required to be pointed out: correlation does not imply causation. And, um, that’s John’s point here about food stamps and depression. Duh.

  54. Jim Rose
    November 5th, 2012 at 22:04 | #54

    @SJ the early posting linked to a post that argued that higher top marginal tax rates are associated with higher not lower GDP growth based on correlations – on measurement without theory. I showed how fragile this link was.

    As summers said: “I invite the reader to try and identify a single instance in which a “deep structural parameter” has been estimated in a way that has affected the profession’s beliefs about the nature of preferences or production technologies or to identify a meaningful hypothesis about economic behavior that has fallen into disrepute because of a formal statistical test.”

    The Scientific Illusion in Empirical Macroeconomics, Lawrence H. Summers The Scandinavian Journal of Economics, Vol. 93, No. 2, Proceedings of a Conference on New Approaches to Empirical Macroeconomics. (Jun., 1991), pp. 129-148

  55. Julie Thomas
    November 6th, 2012 at 06:54 | #55

    @Jim Rose

    So you are saying that, because the left were once ideologically blinded and hence behaved stupidly, it is ok for you to do the same thing now? As in “Miss miss, they did it first!”?

    And sure, it takes a big person to admit they were ‘wrong’. Counselling can help.

  56. Tom
    November 6th, 2012 at 08:05 | #56

    @Ernestine Gross

    Your reaction to Fama is “normal” (in my opinion), the thing is, in economics, although there are economists who are difficult to classify, almost all of them use a specific theory and some cannot co-exist with others due to the fundamental assumptions in building the model. Such as rational expectations (DSGE, New Classical etc) vs adaptive expectations (Post Keynesian).

    In the case of Fama and Mulligan, both of them are New Classicals. Not that they can’t have different opinions, but the policy prescription, economic analysis and modeling are very similar unless they have used their sense instead of their model (being pragmatic is not something New Classicals are good at unfortunately).

  57. Jim Rose
    November 6th, 2012 at 15:55 | #57

    see http://cafehayek.com/2012/08/changes-in-the-disability-rolls.html twice as many people have been added to the disability rolls than added to employment in the recovery from the great recession in the USA.

  58. Jim Rose
    November 7th, 2012 at 09:10 | #58

    see http://marginalrevolution.com/marginalrevolution/2012/11/the-redistribution-recession.html which says that critics misrepresent his arguments and/or respond to the weakest rather than the strongest version of his arguments. They are not criticising him from the vantage point of science.

    Cowen says that the contributions of this book include:

    1. Using data from seasonal cycles and seasonal changes to better understand supply-demand relationships during the Great Recession. These sections are excellent and highly original.

    2. Showing that the normal laws of supply and demand still held and that we were not living in anything resembling wrong-ways sloping AD curves.

    3. Calculation of various implicit marginal tax rates during the Great Recession and showing their relevance for labor supply decisions.

  59. SJ
    November 7th, 2012 at 20:42 | #59

    Blah blah blah.

  60. Graeme Bird
    November 10th, 2012 at 12:01 | #60

    It just never ends doesn’t it? My alleged fellow rightists blaming economic problems on the poor, when its rich slobs making all the decisions. Compare food stamp costs to anything else? What about 500 billion in interest costs per year? What about the endless alphabet soup of government departments? What about implied financial services subsidies? One day hopefully most people would be weaned off the public teat. But this ought not be in a world of tens of thousands of billionaires all doing fine on funny-money subsidies and a riot of government program profiteering. As someone who wants to see a much smaller government, hassling poor people over food subsidies, in the face of 22% unofficial unemployment, would seem to be somewhat low on the to-do list.

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