The only reason I am posting this is that several people seem genuinely unaware of what point Russ Roberts and I were making in the recent blog war. (Here’s a summary in case you’ve stumbled upon the present post.) Let me try one last time to explain. If I can save just one reader, my 20 minutes will not have been spent in vain.
First: We all agree that when it comes to the policy issue of extending unemployment insurance, the important, scholarly issue at stake in terms of the pure economics is whether an extension of unemployment benefits will increase or decrease employment. There are standard, textbook supply-side arguments about why such a move will increase unemployment. There are standard Keynesian demand-side arguments for why such a move will decrease unemployment. So the question now is: Which effect is stronger?
Now then, we all know that Robert Barro came down on the side of the former, while Paul Krugman came down on the side of the latter. But let’s look and see how they actually presented their respective cases to the public, Barro for the WSJ readers and Krugman for the NYT readers.
Here’s Barro in his 2011 piece (the one that Krugman linked in his recent critique):
The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.
In addition, the financing of a transfer program requires more taxes…These added levies likely further reduce work effort…
Yet Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving “aggregate demand.” Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.
Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment.
And of course, Barro then goes on to explain why he thinks the incentive side wins the argument.
Now let’s look at how Krugman handles this tradeoff between incentives versus demand-side effects:
But I thought I could squeeze out a few minutes to talk about something I’ve been thinking about a lot lately: the remarkable extent to which powerful groups, including a fair number of economists, have rejected intellectual progress because it disturbs their ideological preconceptions.
What brings this to mind is the debate over extended unemployment benefits, which I think provides a teachable moment.
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!
You guys really don’t see the difference between Barro’s treatment and Krugman’s? In particular, do you still not see how it’s hilarious that Gene Callahan thought he was defending Krugman by writing, “I’m sorry [David Henderson], but [Krugman] does not “disown” his previous argument AT ALL: zero, zilch, nada. You have not even shown him mentioning it!”