Scott Sumner  

An odd incident in modern liberalism

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Here's Brad DeLong on June 30th 2008, commenting on the Bush administration's decision to enact an emergency unemployment insurance program when the unemployment rate was at 5.5%, roughly the current estimate of the natural rate:

The rule of thumb, IIRC, is that the average duration of an unemployment spell increases by 1/4 of the increase in the duration of unemployment benefits. Thus a 13-week increase in unemployment insurance duration should increase the average unemployment spell by 3 weeks. With current mean unemployment spell duration at 17 weeks, and with roughly 2/3 of the unemployed eligible for UI, this would produce a 3/17 * 2/3 * 5.5% = 0.6% increase in the measured unemployment rate.

It seems to me likely that--whatever happens to the economy--George W. Bush has just produced four bad unemployment-rate headlines on the Saturdays August 2, September 6, and October 4. This cannot be news that John McCain is happy to hear.


DeLong's prediction was exactly correct, the unemployment rate announced on October 3rd was 6.1%.

A few months later Lehman failed and then two days after that the Fed met to decide monetary policy. They voted to keep rates at 2.0%, even though it is obvious now, and indeed was obvious then, that they should have dramatically reduced the fed funds target.

Commenter Kevin Erdmann sent me a portion of the transcript of the meeting.

"Furthermore, we have seen a remarkable decline in inflation compensation for the next five years in the TIPS market. I would not rely heavily on this decline to support my view, but I do have to say that the decline is a lot more reassuring than the alternative. I was also encouraged by the 30 basis point drop in long-term inflation expectations in the most recent Michigan survey. I anticipate that the recent jump in the unemployment rate will place some additional downward pressure on growth in labor compensation, which has been quite low, and in core inflation.

Although the jump in the unemployment rate probably partly reflects the extension of unemployment insurance coverage, a back-of-the-envelope calculation suggests that the upper bound on this effect is just a few tenths of a percent." (pg. 34)


I often have discussions with relative hawkish Austrian economists, who question why I have consistently advocated monetary stimulus over the past 6 years. But even they will usually acknowledge that "of course" monetary policy was too tight in late 2008 when NGDP was falling fast.

There was no "of course" for the dovish Janet Yellen, whose comments are quoted above. (No, that's not Richard Fisher.) Here's how Kevin Erdmann characterized her remarks:

Leaving aside the idea that in September 2008 the FOMC was reassured by a precipitous decline in inflation expectations, note that Yellen here was explicitly saying that the Fed should err on the hawkish side because Emergency Unemployment Insurance was escalating the unemployment rate, and thus masking inflationary wage pressures. The Fed tightening in September 2008 included monetary offset based partly on their belief that EUI inflated the unemployment rate. Keep in mind EUI had only been in effect for less than 3 months, at much less generous terms than its eventual terminus, and the unemployment rate was only 6.1%. I assume that the Fed's hawkish offset increased as unemployment rose and EUI terms became more generous.
On the day of the meeting 5-year inflation expectations (TIPS spreads) were 1.23% (not far from what actually played out.) I found Kevin's observation on the extended UI to be particularly interesting. Yes, Yellen only regards it as raising unemployment by a few tenths of percent. But the program only involved an extra 13 weeks, and unemployment was only 6.1% at the time. When I later claimed that a 73-week extension of UI might have raised unemployment by 0.5% or so, all sorts of liberal commenters berated me for being heartless and stupid. "Do you really think the unemployed don't want to work?" Yes, I think that 1 out of every 200 Americans does not want to work. How many do you think don't want to work?

So Janet Yellen did not want to ease monetary policy, despite a worsening financial crisis, and despite an economy that was sliding into recession. (Unemployment had already risen by 1.6%, whereas any increase over 0.8% signals recession 100% of the time.) And despite inflation expectations being far below the Fed's target. And one of the factors (certainly not the only one) that caused her to want to hold off was the perception that some of the increase in unemployment was lazy bums who don't want to get off their butts and start working.

Don't take this post the wrong way. I'm not trying to criticize the DeLong/Yellen labor market model; indeed I think they are 100% correct. Rather I'm wondering what the heck has happened to American liberalism over the past 6 years? This incident feels like it came from another century, another millennium.

PS. Kevin has some additional comments here.


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COMMENTS (14 to date)
John T. Kennedy writes:

"Rather I'm wondering what the heck has happened to American liberalism over the past 6 years?"

Well, Obama springs to mind....

Brian Donohue writes:

Great work, Scott and Kevin.

I'd like to think I live in a world where Janet Yellen will read and reflect on this.

Andrew_FL writes:

Nobody wants to work. Labor is onerous. People want what they get in exchange for labor. If it was really true that the unemployed wanted to work, we could just put them all in slave labor camps. Why would that not satisfy what they "want" if all they "want" is "to work?"

The question instead should be, how much do you have to offer someone not to work, to make leisure more attractive than labor? The only reason people say they "want to work" is not because leisure is unpleasant, it's because leisure involves forgoing the compensation they could receive for labor.

Doubtless, for some people, the amount they would have to be compensated to choose leisure to labor is close to their current income, and perhaps for a few people the non monetary benefits they receive from labor mean that even offering them slightly more than their current compensation to choose leisure wouldn't make them choose leisure over labor. For most people, though, I'm inclined to think the amount they would need to be offered to choose leisure over labor is less than what they can get for their labor, but more than zero. And for at least some people, it's going to be a low enough value that extending unemployment benefits is going to make some people at the margin choose leisure over labor, that otherwise would not.

But people prefer to make emotional arguments rather than wrestle with what's obviously true?

Kevin Erdmann writes:

I was hoping you'd fix my "ere" (should be "err").

DeLong's estimate would suggest that unemployment would have topped out at 8% or less without the eventual EUI policies that were put in place. It would be great if he saw this and commented.

There were unique disconnections between short term and long term unemployment during this recession. The disconnection does suggest about 2.5% of long term unemployment at the peak was unique to this recession.

Here is a post from a few months ago with a couple graphs showing how tight this relationship was until the uniquely generous EUI policy was put in place.

Scott Sumner writes:

Andrew, Of course some people do want to work, but the gist of your comment is correct.

I hope people understand my "1 in 200" comment was a lower bound. :)

Kevin, Sorry, I've fixed that typo now.

Don't expect DeLong to do the post you suggest, but I do recommend everyone look at your post, linked to in your comment.

Nathan W writes:

If you give yourself three weeks longer to find a job, how much more likely are you to find something where your skills and the employer's demand are better matched, which can lead to both higher wages and profits at the same time?

Kevin Erdmann writes:

Nathan W.,

That's probably a decent defense for extended unemployment insurance from 0 to 26 weeks. But, the effect probably becomes more negative as unemployment is extended. Extending UI from 26 to 50 weeks is probably not so helpful and from 50 to 99 weeks could be quite detrimental. There remain about 1 million workers who say they have been unemployed for more than 2 years, who would be timed out of even the most generous UI programs. This is a unique situation which happens to have coincided with the implementation of 99 week UI.

Here is a study which I would say suggests this is simply a survey error where something has caused long term non-employed workers to be more apt to label themselves as unemployed as opposed to not-in-the-labor-force, and maybe the number of very long term unemployed workers isn't actually that different than previous recessions.

But, to the extent that there is an unusual amount of very long term unemployment, I think we have to wonder if the program was, on net, a detriment.

In some ways, I think it's kind of like being in a line-up where someone asks for volunteers to step forward, and you realize that everyone else has taken a step back. The implementation of generous UI allowed some workers to signal a willingness to go back to work. The workers who held out because more generous UI allowed them more flexibility, by default, might have ended up with a signal that suggested they did not have a bias for working.

I have seen many articles bemoaning the unfairness of employers who see long term unemployment as a black mark. Biases against employers in the press allow authors and readers to make these blanket condemnations, and thus, to not learn from what they are seeing. Clearly this is a signal that HR professionals consider informative. It's probably a signal that is slightly more meritocratic than other existing signals. And, so, slightly less productive workers may be selected out of employment opportunities by this signal.

I'm not saying that all long-term unemployed workers deserve this signal or that they are all less productive. There is probably still much more noise there than information. But, on the margin, this may be part of what is happening.

EUI might have created to a more meritocratic labor market on the margin, and this might have led to more inequality in labor outcomes. I think it is highly underappreciated how much information asymmetries that favor mediocre or destructive workers have prevented meritocratic labor market outcomes, and how this has actually made labor markets much more egalitarian than they would be if employers had perfect information about the productivity of their workers. (One obvious piece of evidence regarding this is the fact that jobs with the most developed productivity measures, such as commission sales jobs, have extreme variance in compensation.) It seems likely to me that some of the recent increases in measured income inequality come from technological advances in productivity measurements.

Andrew_FL writes:

@Scott-Perhaps there are people who want to work for work's sake. People do take unpaid internships, although arguably they are compensated in non monetary forms-in experience, for example. Conceding there might be some small contingent of such people doesn't really change my reasoning.

Anyway, I didn't have in mind to criticize you, so much, as finding it baffling that people bring up the objection "Do you really think the unemployed don't want to work?" in the first place. This old canard never goes away!

TravisV writes:

Bonnie Carr isn't quite sure about Kevin's interpretation of Janet Yellen:

http://dajeeps.wordpress.com/2014/11/09/did-janet-yellen-pass-judgment-on-the-unemployed-in-september-2008

R. Jones writes:

Andrew is partially correct. However, the point about the unemployed wanting to work is that everyone wants meaning or a purpose. Work may be onerous but it gives meaning, a sense of intrinsic worth. Generally, no amount of unemployment benefits can provide meaning, and given that humans are creatures that crave meaning I would say that most unemployed, i.e. non-psychopaths, do desire to have a meaningful life in the eyes of others.

Kevin Erdmann writes:

Scott, I think the fun you're having is distracting from the original simple point.

Yellen believed that inflation and unemployment were related and that EUI should increase the inflation we expect from a given unemployment rate, so under an inflation targeting regime, she adjusted to a slightly less accommodative posture, given the unemployment rate at the time.

It's a simple, explicit case of monetary offset. No assumptions about labor behavior are required.

michael pettengill writes:

My problem is I knew a whole lot of unemployed people and none had volunteered to be unemployed at 20-25% of their employed income.

Many could not avoid effective bankruptcy if they took a job paying twice the employment benefit because they could not service their debts and pay bills needed to go to work on half the pay they had before being forced on unemployment.

Given the obvious insolvency of taking a job at half their old pay, employers assumed they would leave before learning the job and did not hire them. They never considered whether the person willing to take a job at half their old pay was getting unemployment benefits. Many were not getting benefits.

The only way extended UI benefits affects anything is by delaying people dropping out of the workforce as determined by BLS.

No money for gas or laundry means not looking for a job. It does not mean getting a job.

The end of extended unemployment benefits means the labor participation rate has fallen, not more people employed.

michael pettengill writes:

If you want to look back in history for discussion of the dole and employment, I suggest FDR's State of the Union in 1935.

I would love to hear a president repeat his statements and call for his strategy:

A large proportion of these unemployed and their dependents have been forced on the relief rolls. The burden on the Federal Government has grown with great rapidity. We have here a human as well as an economic problem. When humane considerations are concerned, Americans give them precedence. The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America. Work must be found for able-bodied but destitute workers.

The Federal Government must and shall quit this business of relief.

I am not willing that the vitality of our people be further sapped by the giving of cash, of market baskets, of a few hours of weekly work cutting grass, raking leaves or picking up .papers in the public parks. We must preserve not only the bodies of the unemployed from destitution but also their self-respect, their self-reliance and courage and determination. This decision brings me to the problem of what the Government should do with approximately five million unemployed now on the relief rolls.

FDR then speaks as a capitalist:

This new program of emergency public employment should be governed by a number of practical principles.

(1) All work undertaken should be useful- not just for a day, or a year, but useful in the sense that it affords permanent improvement in living conditions or that it creates future new wealth for the Nation.

(2) Compensation on emergency public projects should be in the form of security payments which should be larger than the amount now received as a relief dole, but at the same time not so large as to encourage the rejection of opportunities for private employment or the leaving of private employment to engage in Government work.

(3) Projects should be undertaken on which a large percentage of direct labor can be used.

(4) Preference should be given to those projects which will be self-liquidating in the sense that there is a reasonable expectation that the Government will get its money back at some future time.
:

We have tried 14 years of relief or no relief, but no public investment, and the result is ongoing decline in labor force participation rate, and an ongoing decline in infrastructure quality, and a decline in wealth for the vast majority who get closer to being old and less and less able to do manual labor.

Ending extended unemployment has not increased employment, merely reduced the number of people officially in the labor force, reducing demand for goods, reducing the demand for labor, reducing labor force, reducing demand for goods,

Brian Donohue writes:

Great comments Kevin.

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