How would a “sensible” unemployed person act?

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.

The rhetoric of job-killing has reached absurd levels

The Environmental Protection Agency released new regulations on mercury emissions this week. Predictably, the right-wing has been screaming about the extent to which these regulations will kill jobs. Many observers have already figured out that the right-wing has decided to just call anything it does not like job-killing whether it is true or not. But in this case, the job-killing rhetoric has reached an absurd level.

According to the Environmental Protection Agency, the costs of this new regulation will be $10 billion per year while the savings from this new regulation — calculated by the lost wages of some of those harmed by the mercury pollution being curtailed — will be $90 billion per year. This estimate however might be very low.

Even if we only use the EPA calculation of $90 billion per year of losses, there is no way that this could be a “job-killer.” The right-wing argument for how this is a job-killer is on its face absurd and totally ignorant of even the most basic economics. The story goes like this: by forcing the polluters to stop, you will increase the costs of energy, which will decrease economic activity by an amount equal to those increased costs.

While it is true that increasing aggregate energy costs by $10 billion will negatively impact overall production, that is more than offset by the $90 billion in extra production that comes from saving the mental capacities and lives of those who are currently hurt by the mercury. We lose $10 billion, but we gain $90 billion. Not only will this not “kill jobs,” but it will actually create jobs.

More than that, economically speaking, this regulation functions as a kind of Pigovian tax. I know this is pretty basic analysis, but somehow the right-wing does not seem to get it (or more likely are intentionally misleading people here). When a firm like a power plant is able to externalize costs, that leads to inefficiencies. In this case, the cost of the mercury pollution is externalized on the victims of the pollution. The new regulation forces the firm to internalize these costs, which will ultimately have the effect of making the cost of energy reflect its true price. If people use less energy at its true cost, then so be it.

Although I like to be charitable and assume that the right-wing is not being malicious, more and more it is hard to take that approach. There is simply no way that this could kill jobs, and it makes perfect economic sense to implement it. In addition to that economic nonsense, the increasingly libertarian nature of the right-wing in the US should lead them to be totally outraged that any mercury pollution is making its way into the bodies of non-consenting people. It is after all a violation of an individual’s “self-ownership” to inject poisons into their body without asking them.

Sears and the race to the bottom

The Atlantic Cities ran an interesting piece today about corporate relocation battles. The short of it is that states compete with one another to bring in specific corporations by giving away huge sums of public money. Right now, Ohio and Illinois are fighting over the Sears corporate headquarters, with both states offering around $400 million of public money to the corporation. Incentives like these amount to around $50 billion a year in state and local spending.

This kind of spending is of course disgusting. But, it is precisely what you would expect to happen in a world where capital can roam freely among separate sovereign states. As noted in the above linked article:

“They persist because the states are caught in a collective action system,” says Kenneth Thomas, associate professor of political science at the University of Missouri at St. Louis. “They’d be better off if they all didn’t do it, but as individual entities they’d be better off if they made the offer and it was accepted. Everybody responds, so they’re all worse off.”

This is the classic race to the bottom, a form of the game theory problem known as the prisoner’s dilemma. It would be better for all the states to cooperate and not hand out money to big corporations than to constantly undercut each other and empty out their treasuries competing to bring them in. But, as long as one state breaks the cooperation and starts to provide incentives, everyone else has to or they risk all of the capital flooding out of their state.

Traditionally, you solve problems like this by forcing everyone to cooperate. In a system like the United States, that would involve the federal government disallowing practices like this. There is $50 billion in savings to be had per year if we could do that. This wont ever happen in the political climate of the United States, but that has everything to do with the right-wing obsession with local government.

In fact, as I have written before, the right-wing tries to intentionally keep the federal government from making nation-wide rules in order to force states to compete in just this way. Conservatives think that making states fight one another for access to capital will cause them to dismantle regulations, labor protections, and taxes. But, as the corporate incentives demonstrate, competition for capital does not stop at cracking down on labor and poisoning the rivers. Just as it makes sense for a state to dismantle environmental regulations to lure polluting firms from other states, it also makes sense to simply hand over money to firms to lure them from other states. After all, what better way to promise a greater return on investment than to just fork over cash money.

The end result of this competition among the states then is not a libertarian, low-tax, low-regulation paradise (hellhole). Instead, it is a federal system of independent corporate welfare states all of whom try to lure capital into their specific state by putting tax revenue almost directly into the pockets of massive corporations.