Yes, Casey, there is an aggregate demand problem

Thomas Masterson | August 18, 2011


noun /ˈməligən/
mulligans, plural

  • A stew made from odds and ends of food
  • (in informal golf) An extra stroke allowed after a poor shot, not counted on the scorecard

Casey Mulligan responds to a Paul Krugman post deliciously entitled “The General Theory of Anti-Mulliganism.” Never mind for the moment that Mulligan’s claim that Krugman admits to there being “exceptions to Keynesian theory” is, to put it most charitably, a self-serving reading of Krugman’s post. The use of the word “exceptions” sounds like Krugman is saying that in such-and-such a case Keynesian theory doesn’t apply. Of course, if you read Krugman’s piece, that isn’t the story he tells. This is merely intellectual dishonesty, though. More atrocious is Mulligan’s insistence that unemployment is caused by unemployment insurance. Why? It’s the incentives, stupid!

unemployment insurance reduces employment, rather than increasing it, because it penalizes beneficiaries for starting a new job.

Fascinating! No wonder those unemployed don’t go out and get new jobs. Because people love being on unemployment so much (they’re the envy of their friends), taking a job would certainly be a step down. See, they’d have to give up all that free time. For more money, maybe, sure, but so what? Of course a new job might also help to alleviate the stress on personal relationships, depression, anxiety, lack of sleep, and general ill-health associated with unemployment.

But Mulligan seems to think the only incentives that matter are the labor-leisure trade off beloved of Chicago school economists: the decision people make is whether more money or more leisure will make them personally better off. This is the type of decision that makes sense to Mulligan and other privileged, highly paid people, perhaps—but not to most people who would end up needing unemployment insurance. And it speaks volumes of the opinion that Mulligan and others who make the same case have of working people: if they’re unemployed, it’s because we’ve made unemployment too easy on them, and they are just taking advantage of our generosity. Or, they’re being too uppity: “employers found that people were more difficult to hire and retain when a generous safety net was available.” The unspoken assumption being made here is that the employers’ difficulties are paramount. Mulligan doesn’t explain how unemployment insurance, available to people who are laid off, not those who quit, makes it more difficult to retain people.

Out in the real world, where working people will never have the security of tenure, demand is the problem. Mulligan says “[t]here is still no evidence to confirm the fundamental Keynesian proposition that supply doesn’t matter.” But this is not a fundamental proposition of Keynesianism. The point is, in the short run, supply is not the problem, demand is. The current recession was set off by the collapse of the housing bubble, which caused a large number of people to lose their jobs, quite quickly, and a large number of people to lose large parts of their savings (in the form of lost home equity as home prices plummeted in the bubble areas). This had an immediate and growing impact on consumer spending, or demand. That diminished demand for goods has not yet recovered. The stimulus package was weak tea compared to the need. In our study of the impact of the ARRA, my colleagues Ajit Zacharias, Kijong Kim and I estimated that the stimulus package would create or save about 6 million jobs. But by the time the stimulus package was passed, the economy had already shed 8 million jobs. So while the stimulus package slowed the bleeding (if you look at employment trends, you can see its impact quite clearly), it was never enough to kickstart demand and it ended.

The reason that businesses are not hiring is not because people are not making themselves available for work (because unemployment insurance is such a great deal), it’s because businesses can hardly sell what they make now. Why would they want to increase employment? SPOILER ALERT: they don’t.

Since Mulligan is off looking for his ball in the woods when it’s so clearly sitting in the middle of the fairway, I don’t think I am willing to give Mulligan a Mulligan on this one.


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