Wednesday, April 24, 2013

Unemployment and causation

Megan McArdle:
On Monday, I wrote about long-term unemployment, and why it's a large enough problem that the federal government should be trying to do something about it. I got pushback along two lines: 1. Extended unemployment benefits probably caused the unemployment, by giving people an incentive to stay home instead of finding a job.  2. Regulations and taxes are making it too hard to hire people. I am sympathetic to the basics of each argument. (. . .)

However, I don't see these as viable explanaitons for the current employment situation. Regulations and taxes did not suddenly spike in the fourth quarter of 2008, but unemployment did. And while Obamacare certainly imposes taxes and uncertainty on businesses, I don't think that it, by itself, can have driven the natural rate of unemployment up by 3-5 percentage points. (. . .) 

But six months is the current length of standard unemployment benefits. And if standard unemployment benefits cause very high long-term unemployment rates, how come they only started doing so in 2009? To sum up, unemployment benefits do cause some moral hazard, and taxes and regulation probably do somewhat depress the natural rate of employment in our country. But neither are an adequate explanation for the truly devastating conditions in the current labor market. Which means that--as much as I would love it to be true--we can't fix them by slashing taxes, regulation, and government spending.

This is a very insightful post from a pundit who is definitely not sympathetic to the role of government intervention in the economy.  But Megan very nicely hits at the core problem with a government induced recession story -- what changed in 2008 that was not true in the decade before?

Now you can argue about a financial collapse followed by central banks being uncertain about the best strategy to deal with interest rates that are nearing the zero lower bound that they can typically have.  It's possible that this narrative could explain some of these issues but it isn't an explanation that attaches blame to typical conservative bugbears.

So I think it is good to push back on these narratives.  They may have some role in particular circumstances, but are clearly insufficient on their own.  In fact, the unemployment insurance piece has the possibility of being counter-productive -- denying income to the very needy and reducing what they spend thus leading to even more economic contraction.  When the number of unemployed workers per job opening falls to the 2006/2007 level, that might be a good time to look at the long term wisdom of the program. 

So kudos to Megan for a very good post. 

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