Casey Mulligan blogs about economic issues for the New York Times. He is one of those supply-side economists cut from the University of Chicago cloth (both teaches there and received his Ph.D there). Like the famed Chicago boys, Mulligan almost always toes the simplistic supply-and-demand line, predicting from his armchair how people will behave based almost solely on an analysis of utility maximization.
In the past two years, Mulligan has often written about unemployment benefits including dedicating his last two posts to the topic (here and here). Mulligan has made it clear that he is not a fan of unemployment insurance. More specifically, Mulligan argues simplistically that unemployment benefits cause more unemployment. One does not even need to read the argument to know how it will go: if you subsidize unemployment, you will get more of it; unemployment benefits destroy the incentive people have to get a job; and so on. Mulligan writes:
Sensible, hard working, people will understand the costs and benefits of their important decisions. Means-tested government benefits reduce the costs of being without a job. There are sensible people out there who will recognize that 2009 is not the time for them to, say, commute a long distance to work a job that’s been offered to them but they do not enjoy. Sensible people will recognize that public policies have dramatically reduced the costs to them of searching further for the job they’d like, or making this the year they coach junior’s baseball team, or do some work on their house, or spend time with an ailing parent, or refrain from “coming out of retirement,” or take a trip.
It is not just Mulligan who says this; there are a great number of people who churn out stuff like this all the time. Those who express this viewpoint almost always clad it in this innocent matter-of-fact way that paints anyone who would disagree as just being emotional and irrational. But if we are going to do the armchair analysis of what “sensible” people would do when unemployed, then let’s actually do it for real.
Although Mulligan does not specifically say how a sensible person behaves, presumably he has in mind a utility-maximizer. At minimum, he thinks sensible people are those who “understand the costs and benefits of their important decisions.” So what are the costs and benefits to refusing available work and staying on unemployment? The benefit is pretty small: one gets to avoid working. The costs, on the other hand, are much bigger.
Mulligan appears to think there are no costs because the unemployed still receive an income. This simplistic premise — that the only possible cost to the unemployed is immediate lost income — is what sinks Mulligan’s argument. Dylan Matthews of Wonkblog surveyed some of the costs of long-term unemployment a few months ago. Being unemployed for a long period of time often causes one to grow distant from their friends, discord within families, and a loss of self-respect. An unemployed person also collects lower wages once they do re-enter the workforce relative to their peers who remained employed, 20% lower wages to be exact. Finally, long-term unemployment is correlated with an increased likelihood for depression, stroke, heart attack, and other stress-related conditions.
Given this more comprehensive understanding of the costs of unemployment, how would a sensible person act? Would a sensible person stay unemployed knowing that doing so for a long period of time will likely cause a 20% wage reduction for the next 15-20 years? The loss of future wages by itself — ignoring the squishy psychological costs that economists often stupidly discount — would cause a “sensible” person to try to get out of unemployment immediately.
Believing that safety net programs do not cause a huge number of people to avoid working hard is not simply emotional, compassionate, irrational, hysterical, wishful thinking. Being unemployed sucks just as being poor enough to receive almost any other means-tested government assistance sucks. Almost everyone would rather be in a position where they did not have to be on these kinds of programs, especially “sensible” people. Even a pretty basic economic analysis of costs and benefits demonstrates that.