13 Feb 2014

Tyler Cowen on the Keynesian Pundits’ Views of Employment

Health Legislation 16 Comments

Since Tyler is so much gentler than me, perhaps his opinion on this won’t be dismissed as mere Krugman Derangement Syndrome. In any event, he is saying the same thing as me on this one:

Following the CBO report that Obamacare will induce many people to leave the workforce or cut back on their hours, I have read numerous blog posts suggesting this is benign or possibly even favorable. After all, why should people be forced to work just to keep their health insurance? Imagine a 57-year-old man, freed from the necessity to grub for pay at a second-class retail job, which he had to take just to get insurance to cover the bills for his periodic back treatments.

Alternatively, when I read about demand-side shocks which induce unemployment, I am reminded of the work of Alan Krueger. In two papers, one of which is quite recent…Krueger shows rather convincingly that the unemployed maintain reservation wages which are simply too high. They would be better off lowering those wages, being more realistic, accepting work, and getting back on their feet again. In other settings (not considered by Krueger), other workers seem to be too slow to move to new areas for new jobs, given the costs of being unemployed long-term.

A lot of Keynesians try to maintain the communication of the feeling (if not the outright statement) that demand-driven employment shocks have very little to do with the choices of workers but that is closer to wrong than right. (By the way, sarcastic comments about soup kitchens causing the Great Depression belie an understanding of both this argument and of contemporary search models for the labor market.)

OK, given all that, when those workers, hit by negative shocks, do not rush to go back to work at lower reservation wages, we then read a portrait of hysteresis, despair, and soul-crushing joblessness, a psychic swamp so difficult to escape that even summoning up the strength to go back to work may be difficult.

In other words, would-be workers irrationally undervalue the benefits of having a job and they also underestimate the costs of remaining unemployed.

Now let’s switch settings. A benefit shock comes along, positive for many people, and it induces many of them to work less or not work at all. How happy should we be? And here I mean happy at the margin, due to their change in employment decision.

People, it is rather difficult to have it here both ways. I guess it is possible that workers are irrational in changing their employment decisions in response to changes in relative dollar wage opportunities, but rational when changing their employment decisions in response to changes in relative benefit opportunities. It really is possible.

But are any of you actually arguing that or holding some deep-seated reason for believing in that difference, other than perhaps the reason this post might have induced you to come up with? No, I see one assumption about a destructive choice in one context and the opposing assumption about a beneficial choice in the other context, without much regard for the tension or contradiction between those two assumptions. A lot of you may be subbing in general feelings — “unemployment is terrible,” and “ACA is good,” and simply transferring those general feelings to feelings about the respective marginal changes in employment in each case. That is a fallacy and dare I say it is a “mood affiliation” fallacy?

I am reading what people write on this topic and seeing massive fog through my spectacles, a bit on both sides of the debate in fact.

Bold added by me.

16 Responses to “Tyler Cowen on the Keynesian Pundits’ Views of Employment”

  1. Ken B says:

    If Cowen ever moved into your turf he’d write “Expositions of pedagogical, nay even instructive, intent and purpose directed at those of tender age seeking elucidation of aspects of economic systems and processes.”

  2. Benjamin Cole says:

    ACA is a flop. It joins SSDI and VA disability programs in the disaster file.

  3. Daniel Kuehn says:

    Demand problems needlessly destroy employment relations. Maybe they could get work by cutting reservation wages. Maybe not. Presumably some could so we can run with that. That seems irrelevant. Unless you think the crisis happened because in late 2008 suddenly everyone decided to raise their reservation wage, the source of the problem is different and according to Keynesians at least it is an unnecessary underutilization of productive capacity.

    Now some people do think the crisis was caused by an increase in reservation wages. That’s another discussion – suffice it to say that most of (including Tyler Cowen, I believe) think that’s wrong.

    You might think I’m trying to make the reconciliation that Tyler references. I’m actually not. I’ve said several times now that I don’t think the ACA labor supply shock is “good”. I think the best we can say is that it is certainly not as bad or bad in the same way that a demand shock is. So I’m not really in the position that Tyler is criticizing in the first place.

    • Innocent says:


      I think a demand shock hits, but is recoverable if wages are not allowed to be ‘sticky’ In other words deflation hits and since it hits across the board you adapt and move forward. I think the real issue is that demand shock hit, deflation was not allowed to take place ( though it has been trying to for a good five years ) and demand has been slow to reappear because of incongruity in political and economic arenas.

      Just my thoughts on the matter.

      As far as Tyler goes. yes taking yourself out because you are subsidized is a more benign response to things because it will be gradual. Imagine if it happened over the span of 12 months rather than over the span of 8 years?

      • Daniel Kuehn says:

        No, not benign because it is gradual. Benign because it is not thrust upon you. “I quit” is very different from “you’re fired”.

        Now you can say that “you’re fired” is just as voluntary as “I quit” because you could reduce your wage offer. You could say that. I would not say that.

        I mean this is pretty elementary stuff. One is voluntary because you’re getting an extra goodie and you’re readjusting in response. The other is voluntary because if you want to you can choose to have a crappier life in order to keep a job that you didn’t want taken away in the first place?

        These are different things.

    • Major_Freedom@hotmail.com says:


      Real problems are the cause of demand problems, with the exception of the government destroying dollars against people’s consent.

      2008 happened because of a sudden decline in investment, which THEN resulted in a decline in “spending” across the board.

      2008 did not happen because of a sudden act by the Fed in destroying dollars. The problem wasn’t the Fed printing insufficient money.

      If individuals make incorrect expectations about money holding, such that they don’t make the revenues they expected to make, then you have to ask why is it that so many individuals so close together in time made so many incorrect expectations of money holding. They had the money. The money was owned. People do not capriciously stop spending, or drastically reduce their spending, for no reason. There are very good reasons for doing so. Reasons that should be free to be manifested so that everyone can learn and adapt as to why it happened in the first place.

      The answer is not to cover up this manifestation and pretend that desires to increase money holding times are pure evil or have no coordinating function or do no good, such that the people should get central banking good and hard without their consent.

      Car producers in a free market ought not control the number of times a car is sold in a whole economy. A producer of money ought not control the number of times dollars are sold in a whole economy either.

      If unemployment results from a general increase in money holding times, then that tells us that all those laid off workers were in the wrong line of work, vis a vis individual preferences, and it tells us that there are problems in prices adjusting. We have to then address why prices are sluggish in adjusting.

      The idea of “demand shocks” is an ex post theory used solely to justify inflation and government spending. That is its purpose. The reasons for why prices don’t fall, are taken for granted, and are not seriously challenged or analyzed. Economists by and large will not challenge the government making prices stickier than they otherwise would be.

  4. joe says:

    By now it’s clear the law is a disaster. Maybe the CBO can produce a report on how many hours are consumed talking about it. The law simply needs to be scraped. Anyone defending this garbage sounds just like the neo-cons who defend the Iraq invasion.

    • Tel says:

      Yeah, is there a book open on how long it takes for Krugman to figure out that Obamacare is a disaster?


      I’d estimate about 6 months until Krugman is beating the single payer drum pretty hard. He has already said it was a mistake to have “social insurance” (whatever that is) while also having insurance companies hanging around stinking the place up.

      In a nutshell, he wants something he can proudly call “insurance” without any of the problems associated with actually being insurance. Why bother even calling it “insurance” then? Well, that’s the thing with people calling themselves “Progressive”, they not only feel the need to prove themselves right, they also have to appropriate whatever anyone else thought was a good idea, and then break that hard, just to be able to grin and say, “Don’t be a hater.”

    • Ken B says:

      Is the law a disaster? Polls suggest it might be but I’m not sold yet. I think it will make some democrat cronies rich, and may even help elect democrats. Certainly it builds a constituency. Achieving your major goals is success not failure. Too soon to tell.

      • Peter says:

        So the major goals of this law are now defined as “making Democrat cronies rich, help elect Democrats, and build a constituency”. That would make sense, kind of like the Civil Rights Act, I suppose.
        “I’ll have those n***ers voting Democratic for the next 200 years.” —Lyndon B. Johnson

        We know now that it wasn’t to “help” the uninsured get insurance (By making it mandatory). .

        Oops, I guess.

        • Ken B says:

          If you like your no plan you can’t keep your no plan.

        • Tel says:

          Assumption of self interest isn’t entirely unreasonable, especially with people who regularly declare loudly how much they are doing this for someone else’s benefit.

          Now if Ken were assuming rational self interest that would be stretching credibility.

  5. Transformer says:

    “In other words, would-be workers irrationally undervalue the benefits of having a job and they also underestimate the costs of remaining unemployed.”

    Where does Krugman say workers are being irrational ?

    – Some market interventions like UI move the supply for labor to the left
    – Other like employee-health benefits move them to the right.

    Workers are behaving rational in response to both.

    In Krugman’s world view the rich unfairly siphon off a big slice of the economic pie and market interventions can help address this so its hardly surprising he favors the first type to the second.

    Free market economists (like Bob) would be against both but (I assume) would think an intervention that reduces tax (which is what employee health benefits do) would be better than one that is just a tax-funded transfer.

    If I am correct then both side are simply;y going with their priors on this discussion. What a surprise.

  6. Major_Freedom says:

    One thing that could help employers find and employ new workers looking for a job, is for employers, investors and entrepreneurs to unionize. That way, they’ll be able to collectively bargain in a more fair and equitable manner. Right now, too many workers have too much power and have succeeded in driving exploitative wage rates too high. – Logically consistent liberal.

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