Unemployment Insurance and Paul Krugman: Stating the Issue Correctly
By David Henderson
The issue–and everyone on both sides agrees that this is the issue–is whether Krugman is being hypocritical in his discussion of unemployment insurance.
That’s where the agreement ends. Russ Roberts and Bob Murphy thinks he is being hypocritical and Chris Dillow thinks he is not.
A quick background: In his textbooks, Krugman has laid out quite clearly how unemployment insurance gives people an incentive to be unemployed. This claim is not controversial among economists. See here, for example, for Lawrence Summers’ statement of the perverse effect of unemployment insurance on unemployment. Incentives matter. Indeed, that’s how Krugman discusses the issue–as one of incentives. Roberts quotes Krugman in his 2010 book, co-authored with Robin Wells and Kathryn Graddy, Essentials of Economics:
People respond to incentives. If unemployment becomes more attractive because of the unemployment benefit, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit. Ways to get around this problem are to provide unemployment benefits only for a limited time or to require recipients to prove they are actively looking for a new job.
Again, I remind you that this claim is not controversial. That’s why Russ Roberts found it so shocking that Krugman recently wrote the following:
There’s a sort of standard view on this issue, based on more or less Keynesian models. According to this view, enhanced UI actually creates jobs when the economy is depressed. Why? Because the economy suffers from an inadequate overall level of demand, and unemployment benefits put money in the hands of people likely to spend it, increasing demand.
You could, I suppose, muster various arguments against this proposition, or at least the wisdom of increasing UI. You might, for example, be worried about budget deficits. I’d argue against such concerns, but it would at least be a more or less comprehensible conversation.
But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!
The shocking thing is NOT the first paragraph. The idea that UI can create jobs when the economy is depressed by increasing aggregate demand is an intellectually respectable one. What Roberts, and later Murphy, found shocking was paragraphs two and three above. In them, Krugman completely disowns the claim about incentives that he made in his textbook.
As Roberts put it:
There’s nothing wrong with arguing that extending unemployment benefits is a good idea. There’s nothing wrong with arguing that extending unemployment benefits might reduce unemployment [Roberts added the word “benefits” here but that’s clearly a typo] by increasing aggregate demand. But how do you argue that your opponents are ideologues because they believe the opposite-that paying people to be unemployed increase[s] unemployment when you yourself have conceded that that idea is true?
Before continuing, let’s be clear at the rhetorical devices Krugman uses here. First, he sets it up as the “standard view” that extending unemployment benefits (in a depressed economy) will boost job growth, through Keynesian demand-side effects.
Then, Krugman racks his brains trying to figure out how somehow could possibly disagree with this “standard view.” He says “I suppose” you might worry about the larger budget deficit that this would cause. He doesn’t offer any other possible mechanism by which someone might oppose it.
Finally, Krugman says that that’s not the argument that opponents are using. Instead, they are relying on a supply-side argument, claiming that it would reduce the incentive to work if you paid people not to work. In the context, it is clear that Krugman thinks this is NOT a good objection to the “standard” Keynesian view.
Murphy then adds:
To be sure, a Keynesian like Krugman could argue that in the middle of a big economic slump that such supply-side issues are of only minor importance, and get trumped by demand-side factors. But that’s not at all the argument Krugman is making in this latest blog post. Instead, he is making it sound like Barro et al. are grasping at straws, and not even relying on a coherent argument (such as fear of bigger deficits) when trying to oppose extension of unemployment benefits.
So here’s where we are so far. Both Roberts and Murphy have made it clear that they are not accusing Krugman of hypocrisy for advocating extended unemployment insurance benefits during an economic slump or slow recovery. They are astounded, and certainly implicitly accusing him of hypocrisy. for disowning an argument that he himself has made.
Now to Chris Dillow’s defense of Krugman. Here’s Dillow’s first sentence:
Paul Krugman is being accused of hypocrisy for calling for an extension of unemployment benefits when one of his textbooks says “Generous unemployment benefits can increase both structural and frictional unemployment.” I think he can be rescued from this charge, if we recognize that economics is not like (some conceptions of) the natural sciences, in that its theories are not universally applicable but rather of only local and temporal validity.
Do you see what Dillow did? He misstated the Roberts/Murphy charge. They had both granted that a Keynesian could argue, completely consistent with his own views, that the government should extend insurance benefits. That’s not why they’re accusing Krugman of hypocrisy, as they are carefully to make clear. So Dillow starts off by setting up a straw man. I’ve noticed in the various comments on his post that no one seems to have caught his straw man. Is it just possible that none of the commenters bothered to check what Roberts and Murphy actually wrote?