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
• minimum wage hike
• 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!