Wednesday, September 9, 2009

Straw Man?

There seems to be concern that "incentives do not matter" is a "straw man." -- that nobody actually believes this, so that my raising the issue is just rhetorical smoke and mirrors rather than a rebuttal of a real-live argument.

Some of the big government advocates are too smart to come out and say "incentives do not matter." But it is true that incentives are conspicuously absent from their public policy commentary and design, especially as it relates to the so-called fiscal stimulus.

  1. Why would someone who genuinely believes that incentives matter, build into mortgage modification marginal tax rates that exceed 100%? Why would they do so without out even commenting on why they think 100+% tax rates are OK in this instance?
  2. If incentives really mattered, why did the Obama Administration's stimulus bill analysis neglect to indicate how the bill (either in the form of spending or "tax cuts") would affect incentives to work and to earn?
  3. If incentives really mattered, why did the Obama Administration's stimulus bill analysis choose "multipliers" from the economics literature without even a cursory mention of whether the stimulus bill's effects on the incentives to work and earn would be similar to the government spending episodes studied in the literature?
  4. When Professor Krugman wrote about the stimulus (e.g., here, here, and here), he did not devote even one sentence to the incentives that would be created by the federal spending. If he thought incentives mattered, why is lots of attention devoted to "multipliers" and none to incentives?

The real straw man in this debate has been the characterization of my analysis:

  1. I never blamed the entire recession on unemployment insurance, or on mortgage modification, or even the combination of the two. Moreover, I have repeatedly been clear (e.g., here -- the paragraph that starts "To be clear", and here) that we would have had some kind of recession even if government had not destroyed incentives.
  2. I never said that unemployment insurance is wrong. I called it "compassionate, but inefficient" and a minor contributor to the overall bad incentives created by our government during this recession.

With that said, I appreciate any citation, no matter how distorted it may be!


João Marcus said...

On page 11 (of 16) Krugman writes: “…Thus Chicago´s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work…””
Change the setting and the reason, but get the same result:
“The textile sector is vital do the state of Ceará in northeastern Brazil, so that labor demand in the textile industry is high and needs to be constantly formed and trained. With that in mind, the textile employers union (Sinditêxtil) closed an agreement with the federal government to coordinate a course to prepare seamstresses. The government required that the course should be geared to a group of 500 women that benefitted from the “bolsa família” program (a program whereby the government hands out the equivalent of the minimum wage to families deemed very poor).
Note: The program would include only women that were receiving the benefit! (I guess the government wanted to start teaching people to fish (and decrease the hand-out of fish).
The government provided the funds, the Senai (an educational institution sponsored by the Industrial Federation) gave the course (120class/hours) and Sinditêxtil would make sure that textile firms in the state received the “transcripts” of all the graduates and would then offer them jobs.
Good idea given the low skill level of workers. The course was concluded recently…and ZERO newly minted seamstresses were hired!!!
I´m not joking! Zero hires! And there were plenty of offers!
There is a very simple explanation (direct from the “horse´s” mouth). All the seamstresses refused to be formally employed (registered as a company employee) because that would raise their income level above the threshold. They would only accept to work “informally” (in that way they would keep the benefit because there would be no record of income).
Have “fun at home” and receive x. Work 8 hour days and earn x+ϵ (there´s “0” work incentive in the scheme). What a waste o resources!!!

Tino said...

In 1995 Sweden was in as deep, arguably deeper crisis than the US is now (unemployment went from 2% to 9%, preceded by a financial crisis). In the midst of the crisis the replacement rate from the unemployment insurance was reduced by 5 percentage points.

A Keynesian extremists like Krugman would argue that this could have no effect, as there was no “demand” for workers. Indeed, in textbook Keynesian analysis unemployment should have gone up, since this further reduced consumer demand.

Of course, this is not what happened. Unemployment dropped as a result of benefit cut. (The decrease has been convincingly tied to the benefit cut by Carling, Holmlund and Vejsiu 2001).

It would be interesting to have a discussion whether unemployment is more or less responsive to UI changes during recessions. But Krugman has long since stopped doing serious economics anymore. It’s futile to expect honest debate from him.

The central point is that Paul Krugman is a partisan hack. His columns have very little to do with the standards of intellectual honesty followed by academic economists, and are in this sense detached from his academic work. The sooner you people stop treating him with professional courtesy the better.

Krugman is further misleading his readers about Milton Friedman and Schwartz, by giving the impression that Friedman believed all recessions were caused by the government, and that the latest recession has somehow proved him wrong. As is the style of partisan hacks, he never claims this outright, just alludes it, by writing “Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened.”

Friedman believed that following the 1929 crash there would have been a deep recession, but that the *recession* was turned into the Great *Depression* by the fed. Never did Friedman claim that recessions could not happen in a free market, indeed he documents several recessions caused by bubbles.

The central argument in Krugmans columns is a lie, that the mere occurrence of a recession proves Friedman wrong. Why does he lie? Because it makes his life as a partisan hack easier to use straw-men. “everyone knows we have a recession, not entirely caused by the government, and Paul Krugman assures us Milton Friedman believed all recessions are caused by the state”.

regarding the argument that “the Fed could have prevented the Great Depression if only it has been more aggressive in countering the fall in the money supply” Krugman writes: “recent events appear to disprove that claim”.

Of course it has conveniently escaped hack Krugman that we have not experienced a Great Depression, with real GDP falling 30%. If anything recent events this affirms Friedman!

• Bubble exacerbated by fed policy.
• After crash fed policy mitigates problems, no Great Depression.
• Fiscal policy ineffective (oops Paul).

Donald Pretari said...

Let me try giving an incentives based rationale for a stimulus that reinforces monetary policy, just as in the Chicago Plan.

You have a Flight to Safety/Quality. This is followed by a Proactivity Run ( employers shedding workers, cutting back on costs ) and a Savings Spree ( Hoarding ). You want to produce a plan that will feature incentives and disincentives to battle this trend.

You want short term interest rates to stay low, as a disincentive to buying them. You want longer term interest rates to rise, say to 4% or even 5%, if necessary. This is an incentive for longer term investing and a signal of coming inflation.

You can also signal long term inflation with borrowing. This is also an attempt to show govt commitment to future projects. The point is to buoy up the longer term expectations of inflation and a recovery.

What do you borrow for? I would borrow for:
1) A strong social safety net
2) A sales tax holiday
3) Dated Coupons
4) An incentive for business investing through a tax break
5) An incentive for hiring through a tax break
6) Some infrastructure: just enough to signal govt commitment to future projects and, yes, invest in common goods and employ some people
7) For housing, a cash subsidy for all housing

Why do you borrow? Because you do not want to raise taxes in a Flight to Safety.

I would like a purely monetary plan to work, but I don't rely that much on theory. I want to see results.

Don the libertarian Democrat

PS I won't defend you any more on other blogs, since I seem to be hurting your cause.It seems that people have a hard time understanding that a theory is meant to aid real world problems, not map out every move. A theory is useful if it focuses our attention on the right questions and provides us a useful way of dealing with our problems. Even anomalous results to our own point of view can be useful.