The Necessity of Extending Unemployment Benefits

James Hamilton at Econbrowser summarizes my thoughts too:

Extending unemployment benefits

Here I make two quick observations on the policies being discussed.

The first point has been widely noted, but it bears repeating since I keep hearing comments from people who seem to be unaware of it. When you hear that current unemployment benefits can in some cases be collected for up to 99 weeks, and that Congress is discussing an extension of this program, it is perhaps natural to think this means that some people might be eligible for longer than 99 weeks. But this is not the case. Instead what is being discussed is whether the current limits will be kept in place for another two years or whether the limits will be decreased immediately.

The second point to which I’d like to call attention has also been around awhile, but is appropriately still being discussed (e.g., Calculated Risk, Washington Post). The source appears to be these observations made by Wal-Mart CEO Bill Simon in September:

And you need not go further than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs, and continue to shop and mill about the store until midnight, when electronic– government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.

And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they’ve been waiting for it. Otherwise, we are open 24 hours — come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.

One thing you might take away from such accounts is that the spending multiplier out of compensation for the unemployed is pretty high.

Money spent on unemployment benefits gets into the economy as spending immediately.  Let’s face it, midnight of the day benefits are payable is about as fast it can get.  It’s also evidence that the benefits from last month are totally spent and gone.  That’s economic stimulus.   Tax cuts for millionaires are not high-payback stimulus.  They don’t fully get spent. And they don’t get spent very fast.

Why Do People Work?

Why do people work?  At first it seems an easy question – to get money or earn income is the answer that comes quickly to mind.  Indeed, mainstream neo-classical micro economic theory answers the question this way and uses it to build a model where people (households) make decisions about how much to work (called “labor supply”) as a function of the real wage offered.  There’s a counterpart model where business firms decide how many workers to hire based on the real wage and it’s called “marginal productivity theory”.  It results in a “labor demand” curve. Like moths drawn to lights, when economists are given a “supply” curve and a “demand” curve we must see where they intersect, label that equilibrium, and say all’s well, the market solves everything. We then proceed to use our equilibrium result as block in building an even larger theory or model.  And, in fact, that happens with labor demand and supply.  It becomes a critical part of some mainstream (mostly Classical based) macroeconomic theories.

Unfortunately, this little example also shows economists behaving badly, or at least illogically and unscientifically.  Let’s go back to the beginning.  It’s a huge assumption and leap of faith (or ideology) to go from the casual observation that most people prefer (or need) to get paid for their work to assuming, as mainstream theory does, that money is the only reason people work.  An even greater leap is the assumption that there is a quantitative relationship between real wage rate and the amount of work people are willing to offer.  The mainstream economists assume that work is necessarily a negative, disutility-creating experience. But that is not a logic inference from the observation that people like to or insist on getting paid for work.  It is entirely plausible that people find work a necessary, fulfilling part of life – after all many people are observed to continue working even when they don’t need it financially. If may be that people want balanced lives – a mix of work, leisure, and hygiene.  It may be a mix of these factors. Indeed, research in management and psychology fields suggests it is.

But economists persist in the simplified theory. Unfortunately this leads to misunderstandings and bad models when the economists tackle larger problems like unemployment. Bill Mitchell notes:

The simplest version is that labour supply in the mainstream model (and complex versions don’t add anything anyway) says that households equate the marginal disutility of work (the slope of the labour supply function) with the real wage (indicating the opportunity cost of leisure) to determine their utility maximising labour supply.

So in English, it is assumed that workers hate work and but like leisure (non-work). They will only go to work to get an income and the higher the real wage the more work they will supply because for each hour of labour supplied their prospective income is higher. Again, this conception is arbitrary and not consistent with countless empirical studies which show the total labour supply is more or less invariant to movements in the real wage.

Other more complex variations of the mainstream model depict labour supply functions with both non-zero real wage elasticities and, consistent with recent real business cycle analysis, sensitivity to the real interest rate. All ridiculous. Ignore them!

In the mainstream model, labour market clearing – that is when all firms who want to hire someone can find a worker to hire and all workers who want to work can find sufficient work – requires that the real wage equals the marginal product of labour. The real wage will change to ensure that this is maintained at all times thus providing the classical model with continuous full employment. So anything that prevents this from happening (government regulations) will create unemployment.

If a worker is “unemployed” then it must mean they desire a real wage that is excessive in relation to their productivity. The other way the mainstream characterise this is that the worker values leisure greater than income (work).

Macroeconomists, thinking they have firmly built a macro theory on some “micro foundations”, assume that involuntary unemployment (the kind where you want a job but can’t find a job) simply doesn’t exist unless people are insisting on getting paid too much.  It’s absurb, but that has become the foundation of not only macro theory, but micro theories of distribution of income, and modern policy.


Home Foreclosures – Write Your Attorney General

I support this from Yves Smith at Naked Capitalism.  The law must be upheld. Fraud is fraud. It is not “paperwork glitches” or “snafus” or “correctable errors”.  It has been the policy of the banks and mortgage servicing organizations to file en mass false statements and false documents in our courts.  These practices will not stop unless the senior executives are held accountable for the actions of the organizations they lead.

“Crime Shouldn’t Pay”: Tell the State AGs You Want Mortgage Fraud Prosecuted

Tomorrow, a group of homeowners is meeting with Iowa’s attorney general Tom Miller, who is leading the 50-state effort which is investigating foreclosure and mortgage lending abuses.

This group is presenting a letter to Miller asking them to prosecute bank executives for mortgage fraud and wants to show broad-based support for this idea via having concerned citizens sign it.

Here is the text of their letter:

Dear Attorneys General,

We, the undersigned thank you for investigating fraudulent and illegal foreclosure practices by the nation’s biggest banks.

Your investigation is the best hope for homeowners and communities since this crisis began. Americans are watching. Our expectations are high that we will see justice for the millions of families who have lost their homes, the millions more who are at risk of foreclosure, and the neighborhoods across the country devastated by falling housing values and vacant properties as a result of widespread mortgage fraud.

The bank executives who committed fraud should be prosecuted. Any settlement needs to go beyond fixing paperwork, fully addressing ongoing abuse and ending the flood of unnecessary foreclosures.

We demand that any overarching settlement agreement contain mandatory loan modification programs, including principal reduction for owner-occupant families facing foreclosure and remedies for those families who have already lost their homes.

Now is the time for bold leadership from the nation’s Attorney Generals to hold big banks accountable for the damage they have done to families, communities and the nation’s economy.

I have signed this letter and strongly encourage you to do so. Please visit the site, to support this effort. Thanks