Casey Mulligan has written a post entitled, “The Laws of Economics Have Been Suspended”. Here is the gist:
Professor Krugman is also saying this week that this recession has nothing to do with bad incentives to earn labor income. (Bless him for citing me! When this is all over, I would love to have a monopoly on teaching the “old fashioned” laws of economics.)
I don’t quite understand this obsession with UI-apologetics, because UI (unemployment insurance) is just one of many policies that collectively (and some by themselves) create terrible incentives:
- mandating the employers with large payrolls provide health insurance, but that employers with small payrolls do not
- minimum wage hike
- means-tested mortgage modification (presenting millions of workers with implicit tax rates in excess of 100% (sic))
- mean-tested student loan modification
- unemployment insurance extensions
- state income tax hikes,
- IRS means-tested enforcement of prior tax debts
- marginal federal tax rate hikes on the “rich”!
According to Professor Krugman, I am the only one crazy enough to suggest that a list of bad incentives like this might actually show up in the aggregate data!
Not content to let Krugman take all of the credit, one of the anonymous bloggers over at The Economist has written a post entitled, “Lazy workers, enjoying the dole”, in which they argue:
Mr Mulligan seems to be to be using one point, on which he is correct, to make another, on which he is very wrong. Unemployment benefits clearly do provide an incentive to stay out of work longer. Holding other things constant, we would expect an increase in the generosity of unemployment benefits to lead to more joblessness.
But that does not mean that in the absence of unemployment benefits the unemployment rate would be lower, because one cannot hold other things constant while changing benefits.
Of course, this prompted a response from Will Ambrosini: “The Economist doesn’t understand marginal analysis.” Ouch!
Perhaps this is an example why economists have been much maligned recently.