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You Get What You Pay For

July 5, 2010, 10:14 pm

When we gave government money targeted at single women with kids we got, incredibly, more single women with kids.  And when we give people money only when they are unemployed, we are going to get more unemployed.  The economics of this are pretty bullet-proof.  We may choose to do so because we have a humanitarian desire to cushion hardship, but we should accept that when we reduce the hardship of being unemployed, and actually give people money for not working, we are going to get more people unemployed for longer periods.

Apparently, Nancy Pelosi lives in a different world (no surprise there) there supply and demand curves slope the opposite direction.

Talking to reporters, the House speaker was defending a jobless benefits extension against those who say it gives recipients little incentive to work. By her reasoning, those checks are helping give somebody a job. "It injects demand into the economy," Pelosi said, arguing that when families have money to spend it keeps the economy churning. "It creates jobs faster than almost any other initiative you can name."

Pelosi said the aid has the "double benefit" of helping those who lost their jobs and acting as a "job creator" on the side.

I am rapidly approaching the point where I am ready to throw out the whole of macroeconomics as unprovable and unproductive, serving the purpose of allowing statists to do whatever they hell they want to do with some fig leaf from some goofball macro-economics theory  (and if the necessary theory is not  on the books, Paul Krugman, formerly a real economist, will be more than happy to whomp one up for his buddies on the Left.)

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Category: Economics
  • http://evilredscandi.blogspot.com Evil Red Scandi

    I have mixed feelings about macroeconomics. One one hand I find it fascinating, but on the other it's full of so many ideas and theories that are downright bizarre to anybody who's actually run a business (unless you're reading von Mises, who had a pretty substantial clue). IMHO the practitioners that spend their time matching the shapes of lines and curves on pretty charts are the direct philosophical descendants of the fortune tellers that predicted the future based on animal entrails or the arrangement of bones thrown on the ground. The information is interesting and may even be meaningful if the underlying driving forces and behaviors match as well, but sadly many modern economists (like the infamous quants of Wall Street) seem to pride themselves on divorcing their research from cause and concentrating only on effect. It's certainly much easier to do "research" and "studies" that neatly confine themselves to an Excel spreadsheet or couple of hundred lines of Fortran (or whatever) than it is to actually get out in the meatspace and figure out the why of things. The enemy here appears to be the age-old fatal combination of sloth and hubris.

  • Michael

    I think this from Tim Harford at FT sums thing up well.

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Ambrose Evans-Pritchard at the Telegraph takes a nice swing as well.

  • Perfectly Safe

    What you say is always going to be true, but what Pelosi says is correct too, given that you're actually saying different things. Pelosi's saying, effectively, that more jobs will be available if jobless benefits are extended because people who are jobless will at least be able to spend money on businesses providing goods or services that people need whether they have jobs or not. That businesses with less customers will be more likely to go under and therefore no longer act as a provider of employment is hopefully beyond dispute.

    What you're saying is that demand for employment will drop as jobless benefits increase, which is bound to be true. The current problem is that demand for employment outstrips employment opportunities. In any case, the statements "an increase in unemployment benefits will lead to more people being satisfied with being unemployed" and "an increase in jobless benefits will have a beneficial effect on the number of employment opportunities" are not conflicting statements. One refers to the demand for employment, the other the supply of employment.

    So you and Pelosi can coexist.

  • John Dewey

    Perfectly safe: "more jobs will be available if jobless benefits are extended because people who are jobless will at least be able to spend money on businesses providing goods or services that people need whether they have jobs or not."

    Do you believe the Keynesian multiplier to be > 1? Pelosi probably does, but do you? I assume you understand what that means.

    Perfectly safe: "The current problem is that demand for employment outstrips employment opportunities."

    Is that the problem? Or is the problem that those demanding employment are only demanding employment which they deem worthy of their efforts and which pay more than their taxpayer financed safety net? Is the problem that government restricts - through minimum wage laws, benefits mandates, and other labor market interference - the number of employment opportunities?

  • MJ

    Pelosi is just unbelievable. I wouldn't be surprised to hear the average politician claim that extended unemployment benefits are necessary because we need to help the "less fortunate" among us, but to claim that they are a "double benefit" and a "job creator" is pure rainbow stew. Not even Krugman would claim that kind of free lunch.

  • Perfectly Safe

    Do you believe the Keynesian multiplier to be > 1? Pelosi probably does, but do you?
    I think that extending benefits on this occasion is a more beneficial move economically than not doing so.

    Is that the problem? Or is the problem that those demanding employment are only demanding employment which they deem worthy of their efforts and which pay more than their taxpayer financed safety net? Is the problem that government restricts – through minimum wage laws, benefits mandates, and other labor market interference – the number of employment opportunities?

    That's the current problem, yes. There are various other general reasons for which people do not successfully find employment, and some of them don't reflect well on individual jobseekers or American culture in general, but the exceptional problem right now is that there are more people out of work and less jobs for them to do.

    None of this really impacts my comment on the logic failure in this post. The assertion that an extension in unemployment benefits makes it less uncomfortable to be unemployed is not in conflict with Pelosi's assertion that injecting money into the economy aids job creation, irrespective of the truth value of either of those assertions.

  • mark ii

    Safe,

    Really?

    I have a dollar. I am going to spend it. One dollar spent.

    But in Nancy's world, I have a dollar. She takes half of it and gives it to someone else. We both spend our 50 cents. One dollar spent. The only way you can possible believe that this would have stimulus is if you think that the act of a transfer of money creates a higher multiplier.

    The short term macroeconomic impact is zero. But, the fact is that work creates value. If both people are working then they both have a dollar, which means that there is now two dollars of value in the macroeconomic system.

    But you can see that in Nancy's world, which lacks a supply side vision, the incentives to work are completely crushed. The individual who has a job has less incentive to work because a substantial part of it is taken away from him. The individual who is receiving unemployment benefits also has very little incentive to work because he is being paid to do nothing. Studies have shown that the greatest stimulation of the unemployed to find a job is?......ta dah, the expiration of their unemployment benefits.

    The government cannot create value from nothing or from transferring money around. If it could, we could create an infinite economy by simply transferring money from one individual to another in an infinite loop.

  • Not Sure

    "but the exceptional problem right now is that there are more people out of work and less jobs for them to do."

    There are "less jobs for them to do" because of the hurdles the government puts in the way of employers. So what's the government's solution to this problem?

    Erecting taller hurdles, of course.

  • anon

    Perfectly safe:

    Question was: Do you believe the Keynesian multiplier to be > 1? Pelosi probably does, but do you?

    Your answer: I think that extending benefits on this occasion is a more beneficial move economically than not doing so.

    Here's the problem -- you are assuming that taking $100 in money from a profitable employer and giving $80 to the unemployed (assume gov't skims only $20 to fund the the paper pushed to make this happen) is a net gain. In other words, you're saying the multiplier is greater than one (which is close enough to saying "more beneficial economically").

    The profitable employer no longer has that $100 to expand and hire more people. Instead, that money (well, $80 of it, the rest goes to gov't workers) has been reallocated to folks that have proven themselves to be less productive for whatever reason -- it could be bad luck, or outdated skills, or what have you. (otherwise, they'd be working for the profitable employer).

    Your position is that, on average, the less productive unemployed will make better use of the money.

    The alternate position is that the profitable employer would have made better use of it, and that the potentially productive folks are getting an incentive to stay unproductive.

    Note that one could admit that unemployement benefits are counterproductive, yet feel that the net negative economic effect is overcome by humanitarian reasons.

    In other words -- make the pie a little smaller, but give everyone a piece.

  • John Dewey

    Perfectly Safe: "The assertion that an extension in unemployment benefits makes it less uncomfortable to be unemployed is not in conflict with Pelosi’s assertion that injecting money into the economy aids job creation"

    Would you consider that perhaps you have a limited view about how jobs are created?

    Some jobs are created by entrepreneurs and corporations who evaluate evaluate the cost and supply of labor in determining if their project will be profitable. Unemployment compensation reduces the supply of labor and, by doing so, increases the market clearing price in the labor market. This causes projects to be unprofitable at the margin, thus reducing job creation.

    Some jobs are created by entrepreneurs and corporations who include tax forecasts in determining if their project will be profitable. These entrepreneurs and corporations know that current government deficit spending to fund social programs will have to be paid for by future tax increases. This causes projects to be unprofitable at the margin, thus reducing job creation.

    Some jobs are created by unemployed workers who conceive of services or products they can offer, services and products for which consumers will trade their dollars. As long as those unemployed workers continue to receive transfers from employed workers, they are less likely to undertake the risk of developing those services and goods. At the margin, this obviously reduces job creation.

    Government transfer payments reduce job creation.

  • Gil

    Isn't there a "well duh!" statement to unemployment benefits creates unemployment? Social shame probably has more to do with single motherhood. Even if there were no benefits to single mothers they'd still exist if there's no social pressure for the father and mother to be together and the extended family of the mother would support her and her children. But unemployment? How long would people last without unemployment benefits? Capitalists like to support the free market would give some people the option of working. Really? Work or be a sickly bum. Some choice. If anything it's welfare that give people a choice whether to work or not. Work or be on unemployment benefits. See? Two equal options for some. Of course, in a free market with no welfare and minimum wages laws there going to be very little unemployment. Work or starve. Why would people support charities for the long term unemployed? You don't like carrying the person's arse through welfare so why would carry his arse with charity. Sure people are willing help someone in the short term but hardly any one is going support long term idleness. Hence is it surprising that when unemployment benefits were first introduced in any country unemployment numbers started to take off fast, some people change jobs like clothes and, of course, workers lost their politeness to employers ("hey fire me, I'll just go back on the dole"). Naturally if you were to lose your job in a free market economy you would become a bum in no time then of course you'd polite to your boss, hold a job for the long term at least until a new job was definitely available and if you lost your job you'd work like hell to get a new job even if it means working for considerably less than your last job. Simple.

  • tehag

    The purpose of the news media and of academia is to justify the follies of the governing class to hoi polloi foolish enough to pay attention, and to provide them with irrefutable arguments that might contradict their powers. Macroeconomics, being a product of the academy, if it contradicts Pelosi et. al. is false; where it supports her, it is true.

  • Jim Collins

    mark ii,

    You almost have it right. Nancy takes half of your dollar, but, she gives only 25 cents to the other person. The other 25 cents goes to a government employee who processes the other person's claim on your 50 cents. Overhead counts, especially in government.

  • Patrick

    "I am ready to throw out the whole of macroeconomics"

    They made up a lie to justify Government folly and called it 'science'.
    Keynesianism is to the economy, what global-warmist 'climate science' is to the earth.

  • Methinks

    Do you believe the Keynesian multiplier to be > 1? Pelosi probably does, but do you? I assume you understand what that means.

    I don't think Pelosi even thinks about it - too much botox floating around in that empty skull, paralyzed her remaining three brain cells.

    All she believes is that robbing Peter to pay Paul will keep her and her party in power so that they can collect more bribes.

    I wish I were merely cynical.

  • Patrick

    This sentence encapsulates the lie involved - the lie is about the false theory that 'demand creation' is done by the Government spending money:

    "“The assertion that an extension in unemployment benefits makes it less uncomfortable to be unemployed is not in conflict with Pelosi’s assertion that injecting money into the economy aids job creation”"
    - spending does NOT 'inject money'; that money has to be gotten somewhere - by taxing, borrowing, or depreciating the value of the dollar
    - You do NOT create jobs by taking money out of one pocket (taxpayers or debt holders) and into another pocket. And many will point out that the frictional losses actually retard the creation of WEALTH, by replacing value-added jobs with 'make-work' or idle-ness. Think of unemployment compensation as an act of paying someone not to work. It surely retards wealth creation. (As such, the only real justification for it is as its intended - insurance - compensation for the risks taken on in having/losing a job).
    - As for the 'inject money' via printing money out of thin air or via Federal reserve type monetary policy; that's another parlor trick that the 'rational expectations' crowd has debunked; it depreciates the value of the dollar. it may, at best alleviate recessions by reinflating during deflationary times. But it wont create jobs per se. And moreover, monetary and fiscal policy are separate things.

  • Becky

    mark ii and Jim: I appreciated both of your posts and believe it is no more complex than that. I think WG Sumner said you cannot spend the same dollar in two different places at the same time, and this is a good way of describing that.

  • bobby b

    An unemployed worker who is sitting at home watching soaps and eating Fritos while collecting the $28k or so available per year from unemployment compensation will ultimately be a smaller drag on society than will the gainfully employed worker making $28k or so per year working in the ethanol or the windmill industries.

    The Frito-eater stops costing us money on the day he becomes employed, or on the day his UE benefits run out.

    The ethanol or windmill worker will trigger government subsidies and lost opportunity costs for years after his period of employment.

  • caseyboy

    Sorry I'm getting in late. Pelosi is an idiot.