Tuesday, August 4, 2009

The Laws of Economics Have Been Suspended

The gurus say that incentives do not matter, at least until this recession is over.

"Traditionally, many economists have been leery of prolonged unemployment benefits because they can reduce the incentive to seek work. But that should not be a concern now because jobs remain so scarce, said Lawrence Katz, a labor economist at Harvard." as quoted by the New York Times.

Professor Krugman is also saying this week that this recession has nothing to do with bad incentives to earn labor income. (Bless him for citing me! When this is all over, I would love to have a monopoly on teaching the "old fashioned" laws of economics.)

I don't quite understand this obsession with UI-apologetics, because UI (unemployment insurance) is just one of many policies that collectively (and some by themselves) create terrible incentives:

  • mandating the employers with large payrolls provide health insurance, but that employers with small payrolls do not
  • means-tested mortgage modification (presenting millions of workers with implicit tax rates in excess of 100% (sic))
  • mean-tested student loan modification
  • unemployment insurance extensions
  • state income tax hikes,
  • IRS means-tested enforcement of prior tax debts
  • marginal federal tax rate hikes on the "rich"!


According to Professor Krugman, I am the only one crazy enough to suggest that a list of bad incentives like this might actually show up in the aggregate data!

20 comments:

TGGP said...

I forget if I already asked you this before, but you are not claiming that people are quitting their jobs, instead there are just fewer new hires. Is that it? What evidence would we use to distinguish demand vs supply explanations?

Greg said...

Paul Krugman isn't really an economist anymore... and, as such, has no use for your "laws of economics.

Chris said...

I love the argument by inference. He doesn't ever explicitly state that you are wrong or what he disagrees with. He is too smart for that (and probably doesn't even disagree with you). Instead he selects a topic that he knows his readers will disagree with, throws in some snark and voila! Disagreement without actually disagreeing!

Chris said...

quick question - has there been a commercial real estate 'crisis'? Why does Krugman think it is such a gem?

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