Jon Stewart often makes insightful economics-related comments on his show. Now I think that that’s because he has Nouriel Roubini, um, on retainer:
|The Daily Show With Jon Stewart||Mon – Thurs 11p / 10c|
|America’s Got Nothing|
Seriously- despite the fact that empirical evidence suggests that economists like dark offices, we don’t so much appreciate dark closets, so cut it out. Now that we’ve cleared that up, allow me to give some commentary:
Point 1: You may have noticed that the first news screen reads “125,000 jobs lost in June; jobless rate falls to 9.5%.” Um, how is this possible? Shouldn’t the unemployment rate go up if the economy loses jobs? Well yes, theoretically, unless the U.S. is strategically shipping unemployed people off to other countries…but the unemployment rate excludes people who are not either employed or actively looking for work. In some ways, this makes sense- for example, a stay-at-home mom shouldn’t count as unemployed for the purposes of policy, since she is (presumably) choosing to stay at home, and may even be doing so because the economy is so good that her partner is making enough money for both of them. (Yeah, I giggled at that too.) On the other hand, this also excludes “discouraged workers” who had been looking for work at some point and have just given up and are no longer actively looking for work. Because the unemployment pollers don’t ask the question “would you be looking for work if the economy wasn’t so crappy?”, the unemployment rate tends to understate the true rate of unemployment. (The unemployment rate also gets understated when there are a lot of workers who are underemployed with regard to either hours or skill level.) It’s helpful to know this so that you can take reports of the unemployment rate with the appropriate-size grain of salt. (I keep a salt lick on my desk, for example.)
Point 2: I apologize on behalf of economists in general for not being able to predict the future- we may do it with models, but we don’t have crystal balls. We have to make assumptions just like everyone else in order to make predictions, and, despite the fact that the assumptions are generally more refined than those generated by a monkey and a dart board (though not as good as those of a seemingly clairvoyant octopus), sometimes those assumptions are inaccurate.
Point 3: I’m pretty sure that Christy Romer has a decent sense of humor, but I’m nonetheless curious as to how she feels about this:
All I can say is stop bogarting my schtick.
Point 4 (the important one): To quote Nancy Pelosi: “This is one of the biggest stimuluses* to our economy. Economists will tell you it injects demand into the economy and is job creating.” Roubini explains that Pelosi is right because the people on unemployment benefits spend all of what they get, which employs people to make whatever stuff these people buy and starts a virtuous cycle, whereas the employed people who Fox News argue are paying for the benefits would likely behave more like the following:
So let’s see…there are several points at issue regarding unemployment benefits:
- People worry that unemployment benefits discourage people from finding jobs. People respond to incentives, and this is not an untrue statement. It’s also not an untrue statement that people would run faster if they had bears chasing them, but this doesn’t mean that we should hire a bunch of grizzlies to follow morning joggers around. By providing unemployment benefits, our society has decided that it’s worth having some freeloaders in order to make sure that people don’t live in fear of being out on the street if they get laid off from their jobs. As an economist, I would like to see information on what the freeloader to need ratio is in order to be able to better analyze the tradeoff. Also, if you have an idea for how to separate those who need the unemployment benefits from the freeloaders, I’m guessing a lot of policymakers would like to hear it.
- People worry that extending unemployment benefits will make the deficit worse. Many economists argue that people are using the deficit as an excuse to be against unemployment benefits:
…take it from David Walker, former US comptroller general and now, as president of the Peter G. Peterson Foundation, a leading deficit hawk. “While the current deficits are large, they don’t represent the real threat to the future of the country,’’ he said. “The real threat is the medium-to-longer term structural deficits that will be here after the economy has recovered.’’…
No fiscal falcon with a proper balance of economic and fiscal priorities is going to fault you for supporting that extended aid.
“As a deficit hawk, I wouldn’t worry about extending unemployment benefits,’’ said Bob Bixby, president of the Concord Coalition. “It is not going to add to the long-term structural deficit, and it does address a serious need. I just feel like unemployment benefits wandered onto the wrong street corner at the wrong time, and now they are getting mugged.’’
Some economists even argue that cutting off unemployment benefits could make the deficit worse, since the cuts would give some workers an incentive to go on long-term disability rather than trying to re-enter the work force.
- People worry that unemployment benefits do not make for effective stimulus. In fact, the opposite is likely to be true. Many economists** believe that it makes sense for the government to spend more during bad times and less during good times, since this means that the government is spending less (and thus contributing less to economic activity) when the private sector is spending more and vice versa. Their reasoning is that this would have somewhat of a smoothing effect on the economy. Put in terms of the budget, this concept translates to deficits during recessions and surpluses during booms. (Unfortunately, the government don’t seem to be so good at committing to the surplus part.) Unemployment benefits are convenient in that they work very mush in this fashion, since more people sign up for unemployment in bad times than in good times.
Granted, this money has to come from somewhere. I would hope that the government doesn’t fund unemployment by cutting other programs, since then they are offsetting the stimulus by putting other people out of work…who then apply for unemployment benefits. Instead, the increased unemployment spending is usually financed by borrowing. On this up side, this means that there is a chance that people end up (at least partially) repaying their own unemployment benefits if the borrowing gets repaid when these people are gainfully employed. On the down side, if employed people realize that they will have to pay for this borrowing in the future, they might hunker down and spend less today. (See Ricardian equivalence for more.) Given that many people seem barely able to even say what country the U.S. declared its independence from, I am not so concerned with such sophisticated and forward-looking behavior occurring on a large scale.
There you have it. Now you can sound smart when someone foolishly decides to discuss politics at the dinner table. Or you could just pull out the picture of Christy Romer, since I’m confident that that would shut people up pretty quickly.
* I am trying my hardest to not be the grammar police here. On a related note, did Obama use the word “aight” in his speech?
** I have been asked to explicitly point out that not all economists share this view, at least not in a normative sense. (See Hayek, F.A.)