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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. Jim Rose
    November 5th, 2012 at 18:58 | #1

    @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.

  2. Katz
    November 5th, 2012 at 19:16 | #2

    I doubt that many have called themselves totalitarians either.

    That doesn’t mean that they never existed.

  3. SJ
    November 5th, 2012 at 19:46 | #3

    “@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.

  4. Jim Rose
    November 5th, 2012 at 22:04 | #4

    @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

  5. Julie Thomas
    November 6th, 2012 at 06:54 | #5

    @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.

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

    @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).

  7. Jim Rose
    November 6th, 2012 at 15:55 | #7

    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.

  8. Jim Rose
    November 7th, 2012 at 09:10 | #8

    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.

  9. SJ
    November 7th, 2012 at 20:42 | #9

    Blah blah blah.

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

    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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