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Mulligan talks his book

November 8th, 2012

Before engaging in another round with Casey Mulligan, I’d like to say that, while I find most of his arguments implausible, I don’t think he’s silly for making them. Given the position he’s trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it’s much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate.

Replying to my criticism of his NY Times column, Mulligan suggests that I should have read his book. Perhaps so, but the column is presented as a critique of Krugman’s book, not a plug for Mulligan’s, and I responded in that light. His latest post mentions a couple of points where he draws on the book, but for the moment I’m going to continue to rely on data published elsewhere.

Mulligan responds to my points in reverse order, which makes sense, because his response to my central point is by far his weakest. The big difficulty for an explanation of post-2008 unemployment based on US welfare policies (unemployment insurance and food stamps) is that many other countries with radically different labor markets and policy responses experienced a big and sustained increase in unemployment at exactly the same time, following the global financial crisis of late 2008. In particular, lots of countries introduced austerity policies involving sharp cuts in the kinds of benefits Mulligan is criticising. Mulligan’s response to this evidence is handwaving. First he says that I haven’t calculated the implied changes in marginal tax rates, although its pretty obvious that most of them will be reductions. Then he resorts to US exceptionalism, saying

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

That’s pretty startling for someone representing a school of thought which usually treats economic laws as having the same universal applicability as those of physics.

To try and make sense of an argument like Mulligan’s you’d have to start with the financial crisis as a global shock, then claim that, if only governments had sat on their hands, recovery would have been rapid. Instead, the argument would run, governments acted to alleviate the lot of the unemployed and thereby made things worse. That would be a coherent explanation for simultaneous and sustained increases in unemployment – the only difficulty is that it’s directly contrary to the facts.

It’s worth making the distinction here between changes and levels. Lots of European countries have high marginal tax rates and generous unemployment benefits, relative to the US. But, in many of the worst hit countries, benefits have been greatly reduced. By contrast in the US, benefits are very low but at least some have been increased. If, like Mulligan, you want to argue in terms of changes, then Europe should have seen reductions in unemployment (which was previously higher than the US). In reality, there is very little correlation between labor market policies and changes in unemployment. What has mattered has been exposure to the initial financial sector shock and/or subsequent austerity policies, exactly as Keynesian analysis would predict.

Now let’s look again at unemployment insurance and food stamps. Mulligan dismisses the point that the maximum duration of UI has been reduced, claiming that what matters is the extension from 26 to 52 weeks. That might be true in a brief recession, but in a situation where employment dropped sharply four years ago, and has yet to recover much, it’s obvious that lots of people will have exhausted their benefits. A look at the Department of Labor data confirms this. The most recent data shows 2.7 million continuing claims or 2.2 per cent of the covered workforce[2]. That’s near the historic lows for the series, comparable to the boom years of the late 1990s. It’s true that there are another 2 million people drawing benefits under the Emergency Unemployment Compensation legislation that’s due to expire at the end of this year. But even including them (and a variety of other benefits for veterans and so on) only brings the total up to 5 million, less than 3 per cent of the total labour force (around 20 million of whom aren’t even covered by UI). Less than 40 per cent of the unemployed are now receiving UI, and that doesn’t take account of the big drop in the participation rate since 2008.

On food stamps, I’ll link again to the Center on Budget and Policy Priorities, which notes that the primary cause of increased expenditure on food stamps is the growth in poverty and unemployment since 2008. There was a modest increase in the Recovery act, which, like extended UI is in the process of being phased out. But Mulligan raises an interesting point when he notes that the ratio of food stamp recipients to Medicaid recipients has increased. He implicitly focuses on the numerator, but states have been cutting Medicaid eligibility and payments ever since the budget crisis hit them. So, to the extent that Mulligan’s indolent poor are getting more free food, it’s offset by less, and harder-to-find, medical care. Overall, the incentives to stay out of work in the US don’t look all that enticing to me.

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  1. Jim Rose
    November 8th, 2012 at 18:35 | #1

    see http://democrats.budget.house.gov/sites/democrats.budget.house.gov/files/documents/04.17.2012%20-%20Mulligan%20Testimony.pdf for a summary of his views:

    Economists have identified many cases where means-tested and employment-tested subsidies caused people to work less. It should be no surprise that the same behavioral responses occurred since 2007: a larger safety net reduced employment and hours worked.

  2. SJ
    November 8th, 2012 at 20:01 | #2

    Yes, that’s his argument, Jim, and it’s silly.

    You obviously think that makes a difference that you found a copy of it on a website with “democrats” in the URL. Sorry, but it doesn’t.

  3. Ernestine Gross
    November 8th, 2012 at 20:12 | #3

    There is something back-to-front with macro-economic models in general and with Mulligan’s argument in particular.

    To argue as Mulligan (and others) does that food stamps and unemployment and other social security transfer payments are ‘bad’ for ‘the economy’ strikes me as incredibly perverse. What is ‘the economy’ – a God that requires human sacrifices?

    Suppose we start off with the description of ‘an economy’ in the axiomatic approach to economic theorising. In this case, the basic elements (primitives) of ‘an economy’ are humans, characterised by preferences, and physical resources. Everything else (technology, institutional environment) are add ons that lead to a potentially large number of special cases. In this framework, the Aborigines in Australia had ‘an economy’ before European settlement. Their economy had different technologies to those in present day Australia and it had a different institutional environment.

    What I am getting at is that in macro-economics the philosophical basis for having Economics as a distinct discipline seems to have been lost. For otherwise, it would be quite obvious that it is silly to sacrifice humans for the sake of some abstract objects called real numbers that are used to measure ‘growth rates’ of some aggregates that are supposed to represent ‘the economy’.

  4. Jim Rose
    November 8th, 2012 at 20:19 | #4

    John, You say that Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate to present an operational explanation for the sustained high US unemployment of the last four years.

    • Government Policies and the Delayed Economic Recovery. Editors: Lee E. Ohanian, and John B. Taylor, September 2012. The book examines a wide range of policies that have led to the delayed economic recovery, from increased regulation to ineffective programs that have driven up public debt.

    • The Economic Crisis from a Neoclassical Perspective by Lee Ohanian. Journal of Economic Perspectives, Fall 2010, pp. 45-66.

    • Ellen R. McGrattan & Edward C. Prescott, 2012. “The labor productivity puzzle,” Working Papers 694, Federal Reserve Bank of Minneapolis.

    • See http://www.econ.washington.edu/news/millimansl.pdf for the U.S. Recession of 2007-201? Robert E. Lucas, Jr.

    • Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration by Finn E. Kydland and Carlos E. J. M. Zarazaga

    John Taylor has published too many papers to mention since 2007 on how bad government policies are prolong the great recession:
    • The Rules-Discretion Cycle in Monetary and Fiscal Policy, Finnish Economics Papers, 2011
    • Macroeconomic Lessons from the Great Deviation, in Daron Acemoglu and Michael Woodford, (Eds.) Macroeconomics Annual

  5. SJ
    November 8th, 2012 at 20:34 | #5

    Ernestine Says: “There is something back-to-front with macro-economic models in general and with Mulligan’s argument in particular.”

    Bill Mitchell recently argued something that hadn’t really occured to me before.

    Mulligan’s argument is purely a micro argument, and he doesn’t ever consider the possibilty of any negative macro feedback. There’s simply no macro consideration at all.

  6. bstudent
    November 8th, 2012 at 20:56 | #6

    If Mulligan is right, quits should have increased. They actually hit record lows (from JOLTS). Fail.

  7. Jim Rose
    November 8th, 2012 at 20:59 | #7

    @bstudent can you get unemployment insurance in the USA if you quit your job?

  8. SJ
    November 8th, 2012 at 21:11 | #8

    Go away, Rose.

  9. Ikonoclast
    November 9th, 2012 at 09:28 | #9

    @Ernestine Gross

    “There is something back-to-front with macro-economic models in general…” – E.G.

    I would amend that statement to this.

    “There is something back-to-front with INCORRECT macro-economic models.”

    Ernestine’s following comments also need unpacking IMO.

    “What I am getting at is that in macro-economics the philosophical basis for having Economics as a distinct discipline seems to have been lost. For otherwise, it would be quite obvious that it is silly to sacrifice humans for the sake of some abstract objects called real numbers that are used to measure ‘growth rates’ of some aggregates that are supposed to represent ‘the economy’.”

    I think the charge – that the philosophical (moral philosophical or ethical) basis for having economics as a discipline is lost from macroeconomics – is sustained when the macroeconomics under consideration is neoconservative macroeconomics. Neoconservative macroeconomics is demonstrably unempirical. Its models do not explain the data and indeed run counter to the data. The “crowding out” thesis and the NAIRU thesis both run counter to the empirical evidence. Neoconservative macroeconomics also makes the mistake of using reasoning based on the fallacy of composition; that is inferring that something is true of the whole from the fact that it is true of some part of the whole. However, neoconcservative macroeconomics is not designed for the greatest good of the greatest number but for the good of a few at the expense of the many. (Compare worker conditions in Apple’s Chinese factories with the wealth of Apple shareholders.)

    Good mixed-economy macroeconomics (Keynesian, Functional Finance, MMT) does not ignore the human element but starts in general from the basis that full employment and full capacity utilisation are preferable on both humane and economic production and efficiency grounds. This style of macroeconomics is usually quite explicit that financial macroeconomic measures (like surplus or deficit) are abstract numbers and that real requirements (the moral and economic requirement for full employment) are the first priority.

    The abstract and notional financial system is an enabler, an inanimate tool just as a hammer is an inanimate tool. One can use a hammer to construct useful things or to crack skulls. The financial and monetary system is the same. One can use it to enable and facilitate useful, shared and equitable economic activity or one can use it to generate inequality and wreck lives. The problem of course has become the fetishisation of money to the point where it is believed to be as real as actual real good and services and a value in itself.

    Hence the Keynesian or Functional view of fiat money (and surpluses or deficits) is that the real economy tells us what the fiscal settings should be. In other words, run a counter-cyclical policy and deficit spend until unemployment is about 2% (frictional). As the fiat money system is only a tool to facilitate the running of the real economy, the sole rule is don’t break the tool. The tool break downs under severe inflation or deflation.

    I hope I haven’t misconstrued your views but I can’t see how macroeconomics per se can be dispensed with in a modern democratic mixed economy nation state with a government (fiat) currency, government taxation and expenditure and government overview and management (real or attempted) of aggregate activity.

    You refer to the system which “sacrifice(s) humans for the sake of some abstract objects called real numbers”. Of course, they are not really sacrificed just for these abstract objects. They are sacrificed for the manipulation, accumulation and arrogation of real material wealth to a select few which process is facilitated by this “game of numbers”.

  10. JB Cairns
    November 9th, 2012 at 09:37 | #10

    Main problem is that private sector employment has been fine.

    It is the public sector that has held the recovery back.
    If the public sector employed people as they did when Reagan was Prez then unemployment would be approaching 5%!

  11. Ernestine Gross
    November 9th, 2012 at 10:19 | #11

    SJ, to ‘argue microeconomics’ is not the same thing as having an approach to theoretical models which does away with the distinction between microeconomics and macroeconomics. A systems approach in other words.

  12. Ikonoclast
    November 9th, 2012 at 10:41 | #12

    @JB Cairns

    That’s a very good point. The public sector needs to be the reserve employer. At the lower levels, the public sector should employ everyone on a minimum living wage who cannot get a better job elsewhere. It’s called the Job Guarantee. There are plenty of tasks that need doing in our society from better child care and aged care, to environment remediation, to better vocational training and better roads and infrastructure. We even need citizenship training so people understand politics, finance and economics better. There is something fundamentally wrong with the current system when things need doing and they don’t get done… all because of market failure.

    A clear example of neocon macroeconomic lunacy was the creation of the future fund. Created on or about 23 March to 5 May 2006 the Future Fund had A$50 billion in government surpluses and assets sales channeled into by the end of the 2006-2007 financial year. Bill Mitchell estimates that the future fund monies could have fully underwritten a ten year program of the Job Guarantee. In other words, the application of the Future Funds could have reduced unemployment to zero for 10 years (excepting unavoidable frictional unemployment). The human, social and economic advantages of this move would have been enormous. Instead, in the Future Fund, public monies are locked up and then given to private enterprise in the form of investment funds including investments in tobacco companies!

    The notion of a government saving in its own fiat currency is absurd. Such a government can electronically “print” currency any time it wishes. To save in something you can create ex nihilo is an absurdity. The notion that the Future Fund will pay for future public service superannuation is also absurd. It would be better to expend Future Fund monies now to create needed real infrastructure and real, sustainable material wealth and capital equipment (for example renewable energy). These real resources will then be available for a future government to purchase via fiat currency (for example indirectly through payments to superannuants).

    The Future Fund is open to all sorts of risks and misallocations. Investment in a tobacco company is a clear misallocation. Investment in fossil fuels (if it occurs) is another clear example of misallocation given the large and now proven risks of AGW. In the event of major financial collapse and the collapse of world trade, Future Fund funds will be lost or become worthless. What is the use of paper currency or electronic bits when real goods are no longer available? However, if those funds are used now to employ people and build real, needed, long service-life infrastructure then a real provision for the future will have been made.

    Application of part of the Future Fund to useful infrastructure investment is always possible but not nearly as certain as direct dirigist government action. History proves dirigist policies to be the most successful for fully harnessing national potential and planning to face the future, for example the post WW2 boom of Japan was government funded and directed by MITI. The market left to its own devices is too subject to market failure, too subject to short-termism, too subject to the overlooking of all non-money values, unable to form an overall strategic direction or plan and unable to properly cost (or cost at all) systemic risk and negative externalities.

  13. Ikonoclast
    November 9th, 2012 at 10:45 | #13

    @Ernestine Gross

    Are you referring to or advocating a systems approach which “which does away with the distinction between microeconomics and macroeconomics”? If so, I would be interested in a summary or basic exposition of this approach either on this blog (here or sandpit) or on a recommended link. Thanks.

  14. Ernestine Gross
    November 9th, 2012 at 10:50 | #14

    @Ikonoclast

    “There is something back-to-front with INCORRECT macro-economic models.”

    The trouble is, life of every human is finite while the search for a ‘correct macro-economic model’ may lead to results only in an infinite horizen model of ‘the economy’, a model where people never get the idea of changing the institutional environment.

    If I were to interpret your notion of ‘macro-economic models’ as one decision making aid, then I would agree with the proposition that for a long time we can’t do without them. One decision making aid is very different from relying on macro-economic models.

    I don’t think I ever argued on this blog-site or anywhere else against a ‘mixed economy’.

    I don’t subscribe to the idea that the consequences of the sequence of financial crises since 1987 can be addressed with counter cyclical demand management in national economies such as Spain and the USA or the UK. Yes, it worked in Australia but the initial conditions were vastly different.

    Lets see whether President Obana is more willing to cooperate with the EU on financial re-regulation and taxation, now that he has been re-elected.

    Anyway, no matter how long I contemplate Mulligan’s point of view, I can’t find a reason for changing my mind on his notion of ‘the economy’ being a God that demands human sacrifices.

  15. Ernestine Gross
    November 9th, 2012 at 10:53 | #15

    President Obama not President Obana. I am sorry.

  16. Ikonoclast
    November 9th, 2012 at 13:47 | #16

    @Ernestine Gross

    I need to reply more or less point by point;

    1. “… the search for a ‘correct macro-economic model’ may lead to results only in an infinite horizon model of ‘the economy’, a model where people never get the idea of changing the institutional environment.”

    I get your point and accept its validity. Macroeconomics is institution-conditioned, in the main. However, if we take the idea of punctuated equilibria from evolutionary biology, we discern considerable periods where national insititutional arrangements are in relative equilibrium or stasis. In that period, a macroeconomics of that discrete, though complex, political economy arrangement is surely possible.

    2. “If I were to interpret your notion of ‘macro-economic models’ as one decision making aid, then I would agree with the proposition that for a long time we can’t do without them. One decision making aid is very different from relying on macro-economic models.”

    I agree. They are one decision making aid. They are not the be-all and end-all.

    3. “I don’t think I ever argued on this blog-site or anywhere else against a ‘mixed economy’.”

    I didn’t mean to imply you did. If I gave that impression it’s because I allowed my self to become sidetracked into one of my idee fixe rants.

    4. “I don’t subscribe to the idea that the consequences of the sequence of financial crises since 1987 can be addressed with counter cyclical demand management in national economies such as Spain and the USA or the UK. Yes, it worked in Australia but the initial conditions were vastly different.”

    That’s an interesting comment. And I’d like you to expand on it, in a sandpit if necessary. I guess I would hold that counter cyclical demand management is a necessary but not sufficient condition for healthy economy of the capitalist / mixed economy type. I would also hold that access to adequate resources and a well regulated financial system are also necessary but not sufficient conditions for a healthy economy of the aforesaid type. Again, I would be interested in what you see as the particular problems of Spain, the US and the UK. Yes, I know each country would need a book but you might able to sandpit blog it or point to useful links.

    Lets see whether President Obana is more willing to cooperate with the EU on financial re-regulation and taxation, now that he has been re-elected.

    5. “Anyway, no matter how long I contemplate Mulligan’s point of view, I can’t find a reason for changing my mind on his notion of ‘the economy’ being a God that demands human sacrifices.”

    I couldn’t agree with you more. It’s neocon macro at, or near, its worst.

  17. Ikonoclast
    November 9th, 2012 at 14:19 | #17

    Here is an interesting headline from the ABC News website.

    ‘RBA might be printing money for foreign banks: UBS’

    The first three paragraphs of the article read;

    “UBS analysts Gareth Berry and Andrew Lilley say the evidence that the RBA may have been printing Australian dollars is compelling, but not yet conclusive.

    The main evidence the analysts cite to support their theory is a rise in the Reserve Bank’s foreign currency reserves at the same time as the deposits of foreign institutions lurched upwards by a similar amount.

    “It is as though freshly-minted Australian dollars are being sold directly to foreign central banks and the proceeds added to the RBA’s pool of FX [foreign exchange] reserves,” they wrote in an analysis.”

    This raises an interesting set of issues in the mind of an economically naive person like me. How and when is fiat money created? Initially, I thought it was only formally created at the bringing down of a deficit budget. Subsequent reflection convinced me there might be cases where the Reserve bank creates fiat money at other times by order of Parliament or the Treasurer, perhaps specifically under some sort of enabling legislation which would still be a money bill (one would presume). I find it doubtful that the Reserve Bank has the remit and discretion to unilaterally create fiat money even where it discerns value in doing so.

    If the Reserve Bank and the Australian government both consider the exchange value of the dollar is too and both consider that creating Aussie dollars and immediately selling them to foreign holders is a worth doing (being equivalent to acquiring foreign currency for no real cost except a needed devaluation of the Australian dollar) and if further they considered said action not an immediate risk for domestic inflation, would they do it? Do they do it? If so, what is the mechanism and who essentially makes the decision, Reserve Board or Treasurer or Cabinet?

    If such an event has occurred, does occur, is it not some kind of version of the carry trade or at least a “gaming” alternative to it? After all, what is there to stop the Reserve Bank benefiting from the carry trade, from creating Australian dollars judiciously but exploitatively and playing various other currency games? What is to stop any national treasury of any significant nation from doing the same? Principally, the exchange rates and domestic inflation would seem to be the only practical checks. Do all national treasuries both game the system and know that others game it and thus employ measures and countermeasures unilaterally and/or cooperatively?

  18. Tom
    November 9th, 2012 at 16:02 | #18

    @Ikonoclast

    If the news is true, the only inflation risk Australia have is through imports from currency depreciation. The problem is that the RBA have trouble trying to depreciate the AUD, it seems reducing interest rate is not working well, so interest parity doesn’t seem to hold at the moment; historically, AUD falls when US is in trouble which it hasn’t in this case maybe that’s why it might be attempting a “secret QE” (increasing bank reserves at the RBA).

    Problem is thou, QE do not always work in devaluing currency unless done on a “very large scale” (at least more than Japan as their QE did not work to depreciate the Yen).

    One point that worth consideration is that even if QE does increase the Money Supply (suppose if the economy is in equilibrium so banks are less risk averse), Money Demand might no necessarily increase therefore it might not pressure aggregate demand to exceed supply. However, due to the nature that government spending which almost all the time goes to aggregate demand (other than corruption of course), the Central Banks needs to calculate carefully when they credit the government account (the irony is, the RBA does this on any 1 day the government’s budget do not balance before a government bond gets issued).

  19. sdfc
    November 9th, 2012 at 23:04 | #19

    Jim
    The ineffective programs you talk about increase household disposable income. It’s funny how Ohanian and his ilk never seem to consider income.

    Taylor has embarrassed himself by suggesting there was a V-shaped recovery from the 29-30 recession. His comparison of the early 80s recession with the GFC is a joke.

  20. MG42
    November 10th, 2012 at 08:44 | #20

    Taking a step back, this kind of pseudoanalysis is a symptom of a wider phenomenon. One of the recent features of the hard right is it’s increasingly hard attitude towards the “99%”-ers. If you start to follow their policy and what their talking heads say you can quickly start finding examples all over the place. Blaming poverty on government programs designed to mitigate poverty during a time of much increased global poverty falls under this umbrella. Another is Romney’s call to the 53% that they are being swamped by the 47% who don’t want to work.

    My final piece of evidence regarding the simple dichotomous mindset is the oft-repeated theory that big bad government forced the noble banking institutions to give poor people housing loans in order to win their votes, and when the shiftless poor walked away from their obligations (probably to smoke crack or have abortions) $10 trillion of value was lost in a worldwide financial calamity. Notably absent was any mention of rebundling loans where faulty estimates of risk caused asset valuation models to spit out values that were far too high, massive amounts of leverage being used to generate returns on assets whose safety was misrepresented, and the slew of fraud and lack of oversight that actively pushed loans on people with dubious credit history so that short-term corporate returns could be realised. Since some people are prone to see things in strictly black and white terms, I must emphasise that not everyone who got a US mortgage in the era 2002 – 2007 was squeaky clean, but the “99%” sure as hell didn’t synthesise CDO’s and write financial instruments on them.

  21. Gaz
    November 11th, 2012 at 13:24 | #21

    I think it’s quite clear that the reason unemployment is so much higher in Australia than the US is because Australia has more rigid labour market regulations and a more generous social welfare system.

    Hey, wait a minute….

  22. John Quiggin
    November 11th, 2012 at 15:42 | #22

    I guess I should respond to Ohanian and Taylor as well. My Keynesian utopia of 15-hour weeks recedes a little further into the future.

  23. Jim Rose
    November 11th, 2012 at 16:42 | #23

    @Gaz the Australian welfare system has low income replacement rates because of flat rate benefits. the australian welfare system is highly targeted.

    John, John Taylor is a New Keynesian so your answer would have to be different to that to Lee Ohanian?

  24. Gaz
    November 11th, 2012 at 19:11 | #24

    Unlike the American system where just about anybody can get food stamps. lol

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