What is the Real Situation regarding Unemployment?

Finally! An interesting chart about the unemployment situation from the most important point of view, i.e. labor force participation rate. Of course, we might need to examine what they’re using as “labor force,” but this is the first time I’ve seen this so well illustrated. 

And who knew it was highest under Clinton and was only beginning to improve under Trump. In other words, it still had a long way to go. That was news to me.

Source: AIER via InflationData

Why Extending Unemployment Benefits is a Bad Idea

Danny Vinik, publishing in Business Insider, discusses the pros and cons of extending unemployment benefits, but in spite of a good presentation of the issue, he draws the wrong conclusion.

Average duration of unemployment
United States - 1950 to 2010
[Image from Wikipedia commons
Click on it for a larger version]

Rand Paul had argued: "I do support 26 weeks of unemployment, if you extend it beyond that you do a disservice to these workers. When you allow people to be on unemployment for 99 weeks, you are causing them to become part of this perpetual unemployed group in our economy."

Vinik counters that the reasons for people becoming long-term unemployed are not clear. He points to various studies in support of his argument, and he is fair enough to refer also to a few that support Paul. (For the links, see his original article above; and for further research on the effect of unemployment insurance on the rate of unemployment, see this interesting page at Wikipedia that has some great links to the original research of competent scientists on this issue.)

Mr. Vinik ends with this: "Given the mixed evidence, each scenario is equally likely. Which one would you rather risk? Causing Americans to scam the government for a year or immiserating [sic] millions? This shouldn't be a difficult decision….[Sen. Paul and his Republican colleagues] may be right that jobless benefits discourage work. But they may also be wrong and that's a risk that's too big to take."

What do I take away from Vinik's piece? First, that sound public-policy research is difficult to do, and we desperately need for it to be done so that people don't act on hunches like this; and second, that Vinik's logic is a perfect example of why we don't want human agents interfering with the natural processes of the business cycle. Allow me to explain.

Public-policy science is difficult but vital.

Vinik's piece is interesting and balanced as far as it goes, but he makes two vital mistakes in his conclusions: He affirms that curtailing unemployment benefits would immiserate millions. This statement belongs among those earlier ones that he readily admits have not yet been proven to a high measure of scientific probability. Therefore, this conclusion is quite possibly just as wrong, or even more so.

He also affirms that the alternative choice, allowing a few to scam the system, does little harm. By the same reasoning, this statement is just as apt to be fallacious.

We don't want human agents interfering with natural business-cycle processes.

The problem with interposing oneself as the decider in quandaries like the one facing our legislators is that, at the same time as one gets a warm fuzzy feeling for helping potentially (but not certainly) immiserated millions, one is simultaneously-and certainly-acquiring the responsibility for creating a moral hazard.

I have discussed moral hazard before as follows:

"Kevin Dowd, in a Cato piece entitled 'Moral Hazard and the Financial Crisis,' defines moral hazard this way: " 'A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first….' "New York Times Journalist Shaila Dewan defines it as 'the undue risks that people are apt to take if they don't have to bear the consequences.' "

When a legislator thinks like Mr. Vinik and decides to increase benefits as the lesser of two evils, she spends the money of the country's taxpayers instead of her own, not only (1) to acquire a warm fuzzy feeling, and probably, to some degree, (2) to incur the favor and votes of the unemployed; but also (3) to avoid the fear (not necessarily the reality) of immiserating millions for what she believes is the relatively small cost of allowing some to scam the government, the expense of which would accrue to a large group of people including herself for whom the individual cost is small, and (4) all the while ignoring the possible counterproductivity of adding to the number of government programs that already allow people to scam the taxpayers of some very big bucks–i.e. billions and billions.

I am referring here to, e.g.,: - the unemployment program itself - agriculture subsidies - the food stamp and other dole programs - energy programs - education - fraudulent claims for disability - taxation programs - Medicare/Medicaid fraud and and lots of other abused programs.

So what is the alternative to government doling out money to avoid disappointing some sector or other of the public? I would say, first, stop playing with our money supply, and second, enforce simple and sensible regulation of the banks. But those are subjects for another day.

Then, legislators should instead leave these sticky issues to the states where experimentation can determine the best path forward. For example, should private nonprofits or, better still, individuals themselves take over their own unemployment insurance? I realize that the idea of a nonprofit helping the unemployed, or of an unemployed helping herself, seems like a novelty; but to give just one example, someone has come up with the idea of private unemployment accounts, much like our current 401(k)s, and it is currently working in Finland, of all places. (See the above-linked Wikipedia page under "Finland.")

Don't this and other novel ideas deserve at least experimentation before we do any more blind bailing out of anyone and everyone, including the unemployed?

Blinder's Blindnesses

Alan Blinder, the well-known professor of economics at Princeton, wrote an opinion piece in the Wall Street Journal today. He claims that the fiscal hawks who fear that the stimulus hasn't worked are wrong, and that their refusal to give in on the unemployment benefits issue is misguided--what he labeled "pretty anti-Keynesian thinking."

Well yes, Professor, that's on purpose.


[Thanks to for the image of Brueghel's Blind-Leading-The-Blind]

Blinder later specifies that he is referring to Keynes's recommendations to increase federal spending, and to the idea of reducing taxes so as to increase consumers' discretionary income and hence consumption.

But Blinder himself differs from Keynes (taking permission for his inconsistency from Ralph Waldo Emerson) in that he does not endorse tax reduction. Blinder's own Keynes-bis prescription is, on the contrary, to raise taxes by allowing the Bush tax cuts to lapse (because "we can't afford them"), and to "combine more stimulus in the short run with more budgetary restraint for the long run."

This means, I assume, that the government should allow the tax cuts to lapse and use the increased tax revenue to prolong unemployment benefits (basically a redistribution of income). Then Congress should increase federal stimulus deficit spending and worry about the consequences later (believing, I guess, that wishful thinking today will restrain tomorrow's budget in spite of itself).

Thus, he declares, "Obama's Fiscal Priorities Are Right."

I see several problems with his reasoning.

Problem 1. The spender-Congress's plan, to date, is to increase federal spending through more stimulus AND to raise future spending in the long run when the new health care laws kick in and when the coming baby-boom Social Security/Medicare/Medicaid entitlements explode. This is the opposite of Blinder's long-run recommendations.

Problem 2. By increasing both taxes and unemployment benefits Blinder thinks he is simply redistributing wealth, i.e. taking from Peter to pay Paul, justified by the arguments that (i) taking from the rich is not printing money or incurring more debt; (ii) giving $1 in unemployment benefits, or giving $1 in middle-class tax cuts, or giving a $1 cut to a wealthy taxpayer is "identical" in its impact on the budget; and (iii) more consumption will cure the recession.

This is unproven on three fronts.

a. Let's say we grant that an unemployed person is likely to spend the $1, and let's even grant that a middle-class wage earner will most likely spend it. How can Blinder maintain that a wealthy person, with his armada of lawyers, will still declare the same amount of taxable income if the taxes were to increase substantially? The Laffer curve seems to suggest that wealthy taxpayers will find a way to avoid paying taxes as the tax rate climbs to a more punitive level.

b. It may be true that unemployment benefits financed by the confiscated earnings of the wealthy might force GDP income to shift out of capital investment and land in consumption. But is this a proven recession-buster? It might just have the opposite effect, especially if it's on a large scale.

c. I think Zandi's quantitative model may need a little peer review, and preferably not by a Princeton economist. Today's Wall Street Journal mentions two NBER studies that indicate:

- "... a one week increase in potential [unemployment] benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks" - 1990 study by Lawrence Katz

- "It is well known that unemployment benefits raise unemployment durations" - Raj Chetty of UC Berkeley

- Another study in March of 2010 by Michael Feroli (J. P. Morgan Chase) concludes that "lengthened availability of jobless benefits has raised the unemployment rate by 1.5% points."

3. Blinder says, "[W]e know one thing for sure: As the unemployment rate rises, the disincentives that worry conservatives become less important because there are fewer jobs to find...." Less important? That is nonsensical. He is saying that the chances of finding a job are reduced, but does this mean we have a better excuse to discourage people from accepting work?

I think the contrary. If people are under financial pressure, people will consider working in a different field than they're used to, or at somewhat lower pay, even if only temporarily. This is a GOOD thing, because the bubble economy created imbalances in the workforce that need to be rebalanced. However, if you throw them more benefits, the disincentives will operate to prevent people from hunting for, and accepting, alternative work, and skilled-labor job offers will continue to go unfilled--yes, that's right, skilled workers are hard to find, even today.

Lastly, I would respectfully ask Professor Blinder to drop the moralizing. It's namby-pamby and weak. He says, "In the 1930s, FDR taught us that heedless self-interest is both bad morals and bad economics." P-u-l-lease. He's beginning to sound like a climatologist: "Let's just do the right thing, whether we can prove it's actually beneficial or not."

Not my kind of morals, economics, or science.