Barro v. Barro

by on August 30, 2010 at 2:25 pm in Current Affairs, Economics | Permalink

Robert Barro today in the WSJ, The Folly of Subsidizing Unemployment, estimates that UI extensions have increased the unemployment rate by 2.7 percentage points.

To get a rough quantitative estimate of the implications for the
unemployment rate, suppose that the expansion of unemployment-insurance
coverage to 99 weeks had not occurred and–I assume–the share of
long-term unemployment had equaled the peak value of 24.5% observed in
July 1983. Then, if the number of unemployed 26 weeks or less in June
2010 had still equaled the observed value of 7.9 million, the total
number of unemployed would have been 10.4 million rather than 14.6
million. If the labor force still equaled the observed value (153.7
million), the unemployment rate would have been 6.8% rather than 9.5%.

It's not clear to me why we should assume that the share of long-term unemployment in this recession should equal that in 1983.

Barro also argues:

We have shifted toward a welfare program that resembles those in many Western European countries.

In contrast Josh Barro, son of Robert, in How much do UI Extensions Matter for Unemployment, concluded that 0.4% was probably on the high side:

Two Fed studies suggest that [extensions of UI] may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large.

…The incentive effects of UI extension must also be weighed against
the stimulative effects of paying UI benefits. For some reason it’s
become almost taboo to note this on the Right, but UI recipients tend
to be highly inclined to spend funds they receive immediately, meaning
that more UI payments are likely to increase aggregate demand. UI
extension also helps to avoid events like foreclosure, eviction and
bankruptcy, which in addition to being personal disasters are also
destructive of economic value.

As a result, I am inclined to favor further extension of UI
benefits while the job market remains so weak. I am not concerned that
this leads us down a slippery slope to permanent, indefinite
unemployment benefits (which historically have been one of the drivers
of high structural employment in continental Europe) as the United
States has gone through many cycles of extending unemployment benefits
in recession and then paring them back when the economy improves, under
both Republican and Democratic leadership.

I call this one on both counts for Josh.   

Ken Rhodes August 30, 2010 at 2:29 pm

Alex — How could you possibly call it against the WSJ, with their fair and balanced reporting?

Noah Yetter August 30, 2010 at 2:51 pm

“…UI recipients tend to be highly inclined to spend funds they receive immediately, meaning that more UI payments are likely to increase aggregate demand.”

The economists’ only question certainly applies here: Compared to what?

If UI has an incentive effect at all that means some or all of those receiving benefits in week X could have been employed but effectively chose not to be. If that is true then it is nonsensical to suggest that paying UI to those individuals “increases aggregate demand”. Ignoring the stimulative effects is correct.

anon August 30, 2010 at 3:29 pm

Unemployment insurance leads to moral hazard effects, like any kind of insurance. Wake me up when Robert Barro writes an article about “The Folly of Bailing Out Institutions Which Created Toxic Loans”.

Ed August 30, 2010 at 3:36 pm

Both of the arguments assume that the economy normally generates enough jobs for full employment, and if that is not the case now its an abberation and eventually things will return to normal.

That is a big assumption. Actually, for whatever reason, the private sector has not come close to being able to employ the entire labor force since the Great Depression, even during good times. Now it looks like you can take your pick between lots of make-work government jobs to bridge the gap, European-style people living their entire working lives on welfare, or India-style lots of street beggars.

Bill August 30, 2010 at 4:30 pm

Having helped people with leads and letters of recommendations, I do not believe there is this category of the willful unemployed because of generous UI benefits. Of course, you can come up with a story, but its only a memorable story because it is atypical.

Since unemployment benefits are related to your income at the last job, if you are a low wage earner you’d better hustle because unemployment insurance isn’t going to pay the rent. The middle class, with somes savings, has it better–but are reputationally at risk for being out of work–explain THAT two year gap in your resume to someone.

What I feel more concerned about are new entrants into the workforce–college students, high school graduates, etc. They need something to start off with, or they will be perpetually behind. It used to be, for college students, you could drag out graduation; and for graduate students, you could drag out your TAship, RAship, etc.

But, colleges have changed, and have become more expensive. So, the disguised unemployment for college students is less available. And, their tastes have changed too: the children of the middle class have the expensive tastes of their parents. They need that latte (or mabe cappuchino maker) and an Ipad. But, at least parents will be getting to see more of their children–much more than either want.

As for the elder Barro, he should support the elimination of tenure so that he can become part of a natural experiment. Free Barro from the shackles of tenure. Or, is it free Harvard?

ohwilleke August 30, 2010 at 6:38 pm

Robert Barro’s macro textbook was the single worst textbook I ever used in my entire educational career from at least from high school through law school. It was hard to follow and deadly boring. It was completely divorced from reality and empirical evidence. It failed to acknowledge other points of view or widely known flaws in important macroeconomic models. It jaundiced my view of the entire discipline of macroeconomics, although this was not an entirely undeserved impression.

A conclusion, like the Chicago Fed conclusion that the unemployment rate may have been increased by 0.7 percentage points is also deceptively incomplete when not accompanied by the information that 46% of the unemployed are long term unemployed people who often do benefit, or could have benefited from extended unemployment benefits.

Thus, in exchange for in increase in 0.7 percent of the labor force being unemployed (and I share skepticism that the number is really that high for reasons similar to those of Josh), we saved about 3.7 percent of the labor force from the fate of being unemployed with no means of support whatsoever. Including their families, that’s ten million people who are financially much better off and have been without employment for many months for no fault of their own, and almost all of those families would otherwise be receiving welfare checks, so the public finance cost of extending unemployment benefits is smaller than it appears. Poverty has its own costs and they are deep and often permanent. Programs like extended unemployment benefits help explain why we have continued to have very low crime rates despite high unemployment rates.

A public spending program that is devoted to beneficiaries who would have been needy if the program didn’t exist with about 85% accuracy is a pretty good one compared, for example, to in state tuition subsidies in higher education, Social Security, Medicare, or a great many other programs.

It also follows, almost necessarily given the way one makes the estimate, that a large share of the 0.7 percent of the labor force who would have been employed but for the existence of extended unemployment benefits would still have significantly underemployed if unemployment benefits had not been extended – a situation that often reduces the lifetime incomes of those individuals even net of unemployment payments received. If unemployment insurance is increasing overall unemployment by a little primarily because, for example, fewer skilled electricians become burger flippers right away, I’m not terribly troubled by that result.

winter boots August 30, 2010 at 9:56 pm

Rising unemployment, which has brought stability to the whole community a huge threat! I hope the Government to take effective measures so that this state will not continue!

SteveK August 30, 2010 at 10:44 pm

I don’t think economists understand unemployment at all–or how bad it is likely to get. The fundamental driving force behind rising unemployment the extreme concentration of wealth and income that we now have is TECHNOLOGY. (And globalization, but in many instances that has been enabled by technology).

There is no doubt that the wealthy elite are benefiting from that trend, and that beginning with Reagan, they effectively destroyed the things that might have acted as a countervailing/mitigating force: unions, progressive taxation, etc.

The point, however, is that even as the elite manipulate the system, they do NOT fully understand the implications of what is happening. Those of us who are deeply involved in technology sense that things are moving faster than ever before. Unemployment may well increase dramatically. Income inequality is very likely to accelerate to unthinkable levels: there is simply nothing to stop it. There is a point at which the system will simply no longer function, and I don’t think anyone realizes how fast we may be approaching that point.

I realize this may sound far-fetched, but I encourage everyone to think about it. Here’s a book (available as a free PDF) that gives the most effective presentation of this issue that I’ve seen:

The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future (http://www.thelightsinthetunnel.com).

I also think that we need new economic models, perhaps a completely new paradigm, and this book does actually propose a very interesting one—although it is, of course, politically unthinkable. I don’t think mainstream economists are capable of producing a solution: they are essentially brainwashed with the mathematical models they learn in graduate school, but those models are outdated and built upon silly assumptions.

Also check out the author’s blog http://econfuture.wordpress.com and this post in particular “Did Advancing Technology Contribute to the Financial Crisis† (http://econfuture.wordpress.com/2010/04/06/did-advancing-technology-contribute-to-the-financial-crisis/)

BKarn August 31, 2010 at 4:05 am

Economists don’t understand unemployment. IT geeks who read a book that appeals to their way of thinking do understand unemployment.

Got it.

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