Saturday, September 6, 2014

Sleight of logic

Comes Noahpinion--with an exalted idea of his own reasoning skills?--to challenge a professional colleague;
Casey Mulligan, an economics professor at the University of Chicago and a blogger for the New York Times, has argued that a number of programs designed to soften the impact of the Great Recession ended up giving people an incentive to stay unemployed.
Noah can't resist patronizing;
Economists are like most people -- they like simple stories. They also like effects that they understand. And the idea that taxes are an incentive not to work is a simple, uncontroversial idea. So it’s no surprise that many researchers, pundits and politicians would be attracted to the notion that our long, grinding economic stagnation is a policy error -- that good intentions ended up as bad policies.
William of Occam liked 'simple stories' too, but only when all the facts fit the story. And Noah gets off to a poor start with; Paying people not to work creates a supply shortage, and supply shortages increase prices.

Because paying people not to work does not create supply shortage. Shortages only occur when prices are not free to fluctuate with changes in supply and demand. What paying people not to work does, is to create a new opportunity cost. Something that Prof. Mulligan seems to understand better than Noah Smith;
Labor economists have also long studied the incidence of supply and demand impulses: that is, the effects of supply and demand factors on both wage rates and the quantity of labor. The consensus is that: (a) labor demand is more wage elastic than labor supply and (b) labor demand is even more wage elastic in the long run than it is in the short run.
We won't attempt to paraphrase Mulligan's argument, as it's short and sweet, and deserves to be read in his original. But we will comment on another of Noah's 'pinions. This one, about which, he is correct: ...good intentions ended up as bad policies. Because that's exactly what happened with another policy designed to help alleviate the recession of '08-09; the Cash for Clunkers program.

Designed as a stimulus to the automotive industry, the economists who wrote the above linked to article found that it instead provided a dis-stimulus of around $3 billion to that industry. I.e. it incentivized car buyers to move ahead their purchase of a new vehicle by only a few months, but it encouraged spending less money on that car than had the program not been legislated.

Which might very well be what happened in labor markets. And for the same reason, it changed the opportunity cost.


  1. Did you see this lame article Smith did on the Ex-Im bank?

    Smith is so strange. He's kind of like Yglesias. Sometimes it's like they are aping Krugman and trying to see how much they can say without addressing any intelligent debates on the topic. Then they'll take a position on something where they have clearly looked at the broad spectrum of ideas and make an honest assessment that might even go against type. It's like they have a switch that they turn on and off.

    1. No, I hadn't seen that piece from Smith, and you're right. It is lame.

      He seems unaware that the 'phonics v. whole word' controversy predates the Tea Party by at least half a century. I remember my mother discussing it with her sisters back in the 1950s. My cousins--who lived in a different state--didn't read as well as I and my siblings. We learned phonics and they didn't.

      But, ironically, my first public debate with an economist came over the Ex-Im Bank. He, a bank's chief economist in Seattle, was all for it. For even lamer reasons than Noah; if you wanted to be a respected banker in Seattle you didn't cross Boeing.

      I didn't labor under that handicap, and demolished his argument.