Rebutting Mulligan's argument that the rise in unemployment is primarily due to decreased desire to work

Casey B. Mulligan had an article published in the New York Times last Wednesday strongly implying that for the current recession, "the decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire)."

I left a strong critique of his argument in the comments section of the article, and on his blog, here and here. I think these are good responses, and I encourage you to read them later, but first I'd like to go through the basics of this issue and some of the key arguments very clearly and carefully.

Here is what I see as Mulligan's argument, based on his description of it in his New York Times article:

1) If there is a drop in supply of workers (that is, for whatever reason, workers want to work less), then the firms will be short handed, and will have to work the remaining workers harder (less downtime, less sitting around waiting for something to do), and so worker productivity will go up. There will be more goods produced per worker.

We have seen a recent rise in productivity, thus, there is strong evidence that the supply of workers is down, that is people want to work less (at least the way Mulligan wrote his New York Times article, he either intentionally or unintentionally -- and it looks like intentionally to me -- made it really sound like he thought this was strong evidence.)

2) If, on the other hand, there is a drop in demand for companies products, and thus for workers to produce those products (people don't want to work less in this case; it's just many can't find jobs), then the firms will not be short handed. On the contrary, they will have more workers than they need, and so there will be more downtime, more sitting around waiting for something to do, and so worker productivity will go down. There will be less goods produced per worker.

Because we have not seen a recent drop in productivity, instead it's risen, there is strong evidence that it's not the demand for products and workers that's down, rather it's the supply of workers that's down. That is, people want to work less.

And in two previous severe recessions, the 1930's and early 1980's, we did see a drop in productivity, but in this recession we see a rise in productivity (um, what about all of the recessions besides the two Mulligan chose to mention?).

So, that appears to be his argument. I think it's very weak because, for one, there are other very plausible ways productivity can go up in a recession without there being a decrease in workers desire to work. And for two, the other evidence and logic regarding recessions is overwhelmingly against Mulligan's hypothesis that in the current recession unemployment is due mostly to people's desire to work less (see Nobel Prize winning economist Paul Krugman's current book, The Return of Depression Economics and the Crisis of 2008, for details). This is why the vast majority of top economists don't agree that a decrease in the supply of workers, the desire to work, is the primary reason for the recent high unemployment (for example, see here and here).

In the previous comments I left on Mulligan's blog I gave several reasons why productivity could go up in a recession, but I'd like to go into one of those reasons in a little more detail:

Consider again 1) and 2) above. We have a measuring period for unemployment and productivity, say a quarter, or a year. Now, in that, say, year, suppose there is a decrease in demand for products and thus workers (so it's not that workers want to work less). There will then be two major effects: Effect 1; Immediately, the workers have less to do and so there's more sitting around and less productivity. But, Effect 2: Eventually, some of the workers are let go, and this increases productivity, partly because now there is less sitting around, with more to do per worker, partly because those let go will tend to be the least experienced and productive, and partly because there is now more capital per worker.

Now, if employers are very reluctant to lay off workers, because there is a strong culture of concern for workers and not just the bottom line – a culture like we used to have a lot more of in the 1930s and early 1980s – then for most of the year, or measuring period, we would see much more of effect 1 than effect 2. There'd be a lot more extraneous workers sitting around, and a lot less laying off. With effect 1 dominating, we'd see a productivity drop.

But now let's fast forward to the late 2000s, where there is much less of a culture of concern for workers and much more of a culture of concern for the bottom line. In this culture extraneous workers may not be allowed to sit around with little to do, producing little, for very long at all. They may be swiftly laid off, so that for only a very small portion of the measuring period the company has too many workers, and for the vast majority of the measuring period, it is running lean, with only the most experienced and productive workers remaining, and each having more capital to work with. In this case effect 1 would be small and effect 2 would be large, and productivity would go up.

By contrast, let's again go back in time to the 1930s or early 1980s, where there was much more of a culture of concern for workers and much less of a culture of concern for the bottom line, the extraneous workers may then be allowed to sit around with little to do, producing little, for a long time before managers reluctantly lay them off. They may not be swiftly laid off at all, so that for a very large portion of the measuring period, the company has too many workers. It may only start to get lean at the end of the measuring period, if at all, laying off enough workers so that effect 2 is stronger than effect 1 leaving the firm lean and with only the most experienced and productive workers remaining, each having more capital to work with. In this case – where firms are very reluctant to lay off workers -- effect 1 would be big and effect 2 would be small over the measuring period, and productivity would go down.

Thus, we see one mechanism (and there are others) which could lead to productivity going either way in the face of a decrease in the demand for goods and workers.

A decrease in the demand for goods and workers does not have to lead to a decrease in productivity as Mulligan intones.

We shouldn't try to just print away the crisis

Tim Duy wrote on Thursday:

The problem, in my mind, is that the rest of the world either refuses or is simply incapable of shouldering some of the burden of global adjustment. This inability to adjust appears to be the end result of almost thirty years of global acceptance and US indifference to external imbalances. Global consumption and production patterns, both spacially and intertemporally, are so misaligned that it looks like we are all now in a race to the bottom together. An amazing global policy failure. So, so depressing.

I agree that only attempting to print away the short term crisis would not be the best way to handle it, because it wouldn't address long term problems and grossly inefficient policies the Republicans have given us over the last generation. It would also leave us with regular repeats of such crises.

Investment, especially high return public investment of the kind the pure free market will grossly underprovide due to well established in economics market problems, is far too low, and consumption is far too high. This is a direct and very strong result of, among other market problems, what Tim's Steve Waldman link was indirectly referring to -- the pink elephant of economics, positional/context/prestige externalities.

This and other long-term problems, harmful policies, and anti-thinking, simple-minded Republican ideology must be corrected, rather than solely trying to print away this short term crisis only to have regular repeat performances and low long-term growth in wealth, science, medicine, and total societal utility.

Of course, it would be best to do both areas well, to have strong and smart monetary and non-monetary measures.

We've far from used up all the positive NPV government investments

Hi again, with short term deadlines looming, I haven't posted in a while, but I have been actively commenting. I consider that like dinner discussion, so I do it a lot faster, with a lot less double checking and polishing. Anyway, I made one comment today that I think is worth posting (with some polishing).

I was noting that serious pure free market problems like externalities, etc, have long been established in economics (scientific academic, not self-proclaimed), and J. Thomas responded:

One view is that while markets do have their serious intractable problems, government is even worse. I have heard this attributed to the GMU school -- while free markets have insoluble problems which are pretty much guaranteed to lead to disaster, still every other alternative is even worse. So we might as well advocate unfettered free markets despite the evidence.

This get's into the "market failure versus government failure" issue, so how to respond? Certainly there's not time, the readers or mine, here and in most situations, to go into the mountain of theoretical and empirical evidence for a great increase in high NPV government investments (and there's tons of them). So what's a good way to explain this briefly?

I think what I came up with is good:

So it's best to have no government spending at all and thus no government at all? Obviously that would devastate national productivity and wealth, with no public police and military, no public schooling, vaccinations, sanitation, etc., etc.

There's a far better alternative to 100% pure free markets, a mixed economy with predominantly free markets, but a great deal of smart regulation and government investment. You greatly over-rate the problems of the government and under-rate the problems of the pure free market.

Let me put it this way:

The next time there's a bill to spend billions on basic scientific research into quantum computers, or basic scientific research related to solar, or on universal preschool, or decoding cancer genes and placing the results freely on the internet, so every scientist in the world can use them, rather than the tiny fraction who could if they were decoded by a private company and kept secret from competitors (you can't practically patent and widely sell this), the next time there's a bill for the government to spend billions on these things, will you oppose it, preferring that the billions instead go to tax cuts for the rich, so instead of the above things we get more and bigger yachts and mansions, and predominantly close to zero-sum-game prestige arms race goods?

If half the government investment money is flushed down the toilet (and nowhere near that fraction will be wasted relative to the waste of a typical private business -- in a Democratic administration that wants to do government well and believes in thinking and competence), the other half that's spent on these things will still provide massively greater growth and total societal utility over the long run.

For more on this, please see here.

The U.S. "has a technology called a printing press"

So I'm working hard on meeting my deadlines for the upcoming University of Arizona Free Personal Finance site and course, as well as an unusually large teaching load, running our business, etc., etc., and the Wall Street Journals are piling up. So I decide to take a break and go through them. In the Tuesday, November 18^th Money and Investing section, I run into something very interesting:

In his famous address on fighting deflation in 2002, Mr. Bernanke said the Fed wouldn't run out of ammunition to influence prices, even after cutting interest rates to zero: "The U.S. government has a technology, called a printing press ...that allows it to produce as many U.S. dollars as it wishes at essentially no cost,"

Ok, so why have we not used that printing press a lot more? William Buiter of the London School of Economics wrote on Saturday that the Fed had doubled its balance sheet since the crisis started. This means that the Fed has printed up (or the electronic equivalent) a great deal of money, and used it to pay for the purchase of U.S. government bonds and other financial assets. But with the economy nonetheless on the brink of deflation and a severe recession or depression, why doesn't the Fed print a lot more?

The risk of future inflation is far less of a danger right now than the risk of deflation and depression, plus the Fed has tools that can combat any future inflation quickly and effectively. Very short term rates are close to zero, but medium and long term rates are far from zero, and the evidence is strong that if the Fed printed a massive amount of money to buy up those securities, and thus down their real interest rates, it would be a great stimulus.

So why isn't the Fed doing these open market purchases on a much greater scale (as opposed to discount rate cuts which are about exhausted)? Unfortunately, we can't have a massive and intelligent fiscal stimulus for another two months when the Democrats take power, but Bernanke can act in a strong way now with massive open market purchases (which would also lower the interest the government pays on its fiscal stimulus, and thus decrease inhibitions about spending due to the deficits). Why isn't he? This is an important question that is not discussed enough in the economics/finance/politics blogosphere.

There's nothing more important for Obama to achieve than universal health care.

Regarding Mark Thoma's post, "Will the Financial Crisis Crowd out Health Care Reform? Should It?":

I strongly believe that health care is the most important thing. It is the most valuable thing that can be done when considering the probability distribution of its payoffs -- in non-mathematical-economics jargon, it is the most valuable when considering how much good it's likely to do.

Why is this?

Isn't there more potential to do good (or prevent bad) in combating global warming? Yes, but the best way to combat global warming is to pass a good universal health care program, or at least to move us greatly in that direction. The reason is that this would be so enormously good for people's lives, and for the economy, that it would generate a gigantic amount of gratitude and political capital for the Democrats, and that would allow them to push through far stronger anti-global warming legislation -- a lot more money for alternative energy, a lot greater conservation measures, etc. And it would also help Democrats in elections for decades to come, greatly decreasing the harm Republicans can do on so many issues (at least in the Republican party's present extreme, anti-thinking form).

There's nothing more important than passing a good universal health care program, and hopefully Obama won't falsely think it's too politically risky to push for this, because once we've had it, and Americans saw the reality of just how much better it made their lives, rather than the Republican false arguments and lies, it would be like the New Deal; it would generate enormous gratitude and political capital for decades; it would expose the falseness of the Republican arguments and lies, and the Republicans would never be able to get rid of it. Would the Republicans dare even to try to get rid of old age social security, medicare, or unemployment insurance? No, these are programs that the Republicans could never get rid of once enacted. Universal healthcare would be the same.

As Nobel Prize Winning Economist Paul Krugman wrote in his 2007 book, "The Conscience of a Liberal", "Health care reform is the natural centerpiece of a new New Deal. If liberals want to show that progressive policies can create a better, more just society, this is the place to start." (page 216), and, "The most dangerous government programs, from a movement conservative's point of view, are the one's that work the best and thereby legitimize the welfare state." (page 228), and finally, "Getting universal care should be the key domestic priority for modern liberals" (page 243).

The question, then, is how to best achieve universal health care, by pushing for it first, or by first passing a stimulus plan and other measures to deal with the recession and credit crisis, or by doing all of it more or less simultaneously in one big package?

I think it actually might be better to pass bills dealing with the recession and credit crisis first, and certainly with the extreme downward spiral, this must be done as soon as possible to stop and reverse this spiral before it leads to a demand decreasing, negative spending chain reaction that gets completely out of control. It's just do you do it separate of healthcare, or along with healthcare as part of the stimulus. If you push through quickly some good strong stimulus and pro-credit measures and regulation, separately of healthcare first, that could create valuable public approval for the Obama administration, and thus political capital and momentum for tackling the health care legislation next.

On the other hand, enacting universal health care, hopefully, or at least legislation that moves us greatly in that direction, would in fact also be a great fiscal stimulus to combat the current recession. It could in the first year add over $100 billion to spending, even though after the transition period it will not be far from cost neutral for the economy as a whole. Because of the efficiencies of a good universal health care program, we can cover everyone for close to the same amount as we currently spend with 50 million uninsured and 1/3 of adults between 18 and 65 spending some time over the last two years without health insurance.

Universal health care not only would be a strong fiscal stimulus, it could probably be sold as such, at least fairly well. A problem, though, is the campaign for it can then get bogged down in its fiscal and deficit virtues, rather than its long term benefits in per capita health care savings, and how much more secure and better it would make the lives of the middle class and the vast majority of Americans in general. These benefits are a much stronger selling point, so it really may be better, stronger politically, to just push through the deficit and credit market plans quickly, and then focus completely on the great importance and benefits of universal health care (I really hope), or at least a program which moves us greatly in that direction. Still, something crucial to keep in mind is that the political capital, urgency, and momentum from a strong electoral victory usually dissipates very quickly, so it can be very dangerous to wait even a short time before trying to pass universal healthcare.

Hard to say, though, what's the best strategy. It depends how you package and promote it; the main thing is to just do it. As Krugman wrote today, "The bottom line, then, is that Barack Obama shouldn’t listen to the people trying to scare him into being a do-nothing president. He has the political mandate; he has good economics on his side. You might say that the only thing he has to fear is fear itself."

By the way, here are some suggestions for at least moving us greatly in the direction of universal healthcare which would be highly attractive to the public and politically strong:

1) A very strong reinsurance program, like the government pays all "catastrophic" health care costs, with "catastrophic" defined as any and all costs over $50,000. This would obviously plummet health insurance premiums, and would be a huge step towards universal health care. You can pay for this with increased income taxes on earnings over $250,000, and with increased corporate taxes, especially given the huge savings corporations would realize in decreased health insurance costs.

2) Lower the age for medicare eligibility to 50. This would be hugely popular, especially after it was enacted -- try taking it away then! The 50 to 64 age group has by far the hardest problem with health insurance. They're in such danger here. Of those who don't already get universal healthcare through Medicare (Yes, we already have universal healthcare, and have had it for 40 years, it's just only people age 65 and older get it, and they love it.), they have the worst health, the greatest risks, the highest costs, and the most difficulty obtaining coverage. They have so much stress and worry about being ruined by illness, either because they don't have health insurance, or they might lose it, or the insurance they have doesn't end up paying for tens or hundreds of thousands of dollars of the costs of an illness. Senators who voted against lowering the age of Medicare to 50 could really get nailed to the wall on this in the next election. People over 50 vote heavily, and this is a huge deal for them. It's also a huge deal for people in their 40s, knowing that guaranteed coverage would be so close. And 40-somethings are another group which votes heavily. You can pay for this by raising the Medicare payroll tax only for income over $250,000.

With regard to any fears about the costs or short term deficits, if you think these programs provide too much stimulus, and thus too much in short term deficits, just increase taxes on the wealthy to ratchet down the deficit and stimulus effects, and certainly enact large tax increases now on the wealthy to begin phasing in after three years, when the recession should be over, so that the projected deficits after 2011 move quickly to surpluses. For details on this, please see my post, "We can fight the recession, make large high return government investments, and balance the budget, all three – over four years."

A reminder; in an earlier post I noted that Jonathan Chait claimed that a universal health care bill could be structured in such a way that it could not be filibustered. It would only require 50 votes in the senate (plus the vice-president's to break a tie). I'm not positive Chait is right, but there's strong evidence that he is. I certainly hope the Obama administration will consult with legal specialists on this.