Emergency Rooms Just Encourage Drunk Driving

December 8, 2010

by Roger Koppl

I do not understand why so many pro-market commenters are opposed to extending unemployment relief.  The supposedly killer, knockdown, unanswerable argument is that unemployment relief encourages unemployment.  Hospital emergency rooms encourage drunk driving.   Should we therefore close hospital emergency rooms?  Those of us in the Austrian school of economics keep saying, and rightly I believe, that the economy is slow to recover mostly because of “regime uncertainty.”  All that activist government policy to stimulate here and bailout there is creates uncertainty for business investors.  Better to curry favor in Congress where they make the ever-changing rules than to try to figure out what consumers might actually prefer and what the underlying scarcities might actually be.  This, we say, makes for a sluggish economy and a bad job market as we get bailouts instead of investment, politics instead of economic adjustment.  If we really believe all that, then we should also believe that most of the unemployment out there is not the fault of the unemployed.  

Sure, there is some gaming of unemployment relief, but it is difficult to be without work even apart from the loss of income.  And  federal unemployment benefits average only $300 per week. Most of the nearly 10% of the work force enduring unemployed would be only too happy for a job offer.

With the current unemployment rate, federal unemployment benefits cost between 75 and 80 billion dollars per year.  At about 2% of the federal government budget, that’s not chump change.  But at least this budget item produces a direct benefit to unemployed Americans most of whose jobs were lost because of bad policy by the same federal government now acting to mitigate the harm it has produced.  

Let’s get the government’s economic policy in shape before attacking the one corrective measure that reliably helps the ordinary Americans most harmed by the current policy regime.

44 Responses to “Emergency Rooms Just Encourage Drunk Driving”

  1. James Pier Says:

    The causation of the unemployment is immaterial to the question of the extension of benefits. There are two built-in disincentives to those benefits: 1. The unemployed have less incentive to find gainful employment. To minimize this disincentive by emphasizing the small size of the benefit per beneficiary is to misunderestimate the value of that small benefit to many of those beneficiaries. For many Americans, $300/week with no withholding gets them by just fine, especially when the added benefit of not having to go in to a job one doesn’t enjoy is taken into consideration, and also the fact that many of those beneficiaries can earn unreported income in that “free” time. 2. The cost of those benefits, in addition to coming from general tax revenues, where it is the proverbial “small and diffuse” cost, falls on employers, and thus acts as a further disincentive to hiring, not to mention the impact on the attractiveness of their available positions to the labor supply. For many employers, they are competing with Uncle Sam for labor. Add all that up, and it is no wonder that study after study shows that extended benefits leads to extended unemployment.

  2. Lee Kelly Says:

    You commie!

    I am ambivalent about extending unemployment benefits. Even assuming the cons outweigh the pros, it’s probably the least bad thing the government has done recently.

  3. Pietro M. Says:

    I believe that among all the economic interventions of the last years, unemployment relief is the least harmful to economic recovery, and if a fraction of the funds wasted to enrich banks and prevent economic readjustment were channeled toward these reliefs I would feel quite content.

    There is of course an incentive problem, which is not a moral hazard problem because as you claim most cyclical unemployment is not caused by the unemployed.

    But the likely magnitude of this problem is nil if compared with the total nonsense of the incentives to create systemic fragility in financial markets.

    A small subsidy conditional on the state of the economy or anyway limited in time, maybe with some other conditionality, would do little macroeconomic harm, and help many victims of the collateral damage of macropolicy folly.

    Anyway, people should be taught to save, stay liquid, and avoid debt, although these virtues are privately irrational given the present policies.

  4. Wonks Anonymous Says:

    Pro-market commenters think private hospitals should determine their own emergency room policies, and as long as the rest of the public doesn’t pay for them it’s fine.

    Cut the employer’s share of payroll tax instead. Or increase EITC. Or make UI a lump sum which you don’t lose if you get a job.

  5. James Pier Says:

    By the way — let’s start by stipulating that the emergency room example is a straw man. Emergency rooms are no more incentive to drive drunk than they are an incentive to get shot. The incentive to drive drunk is that the driver wants to get to his intended destination. He has no intention of visiting an emergency room, any more than he has of killing a pedestrian and getting thrown in jail.

    The low-to middle-income unemployed man, on the other hand, throughly enjoys being paid not to work, at least in many cases. If this is difficult for you to believe, then you indeed lead a sheltered life. Try mixing with Hoi Polloi.

  6. James Pier Says:

    Mr. Koppl –

    You appear to claim that you are an Austrian. What then of the contention, at least as I understand it (I am admittedly a layman in economics), of Mises and others in the Austrian tradition that were it not for interventions such as minimum wage laws and unemployment compensation there would be virtually no involuntary unemployment?

  7. koppl Says:

    Thanks to all for those comments. I like Pietro’s phrase “collateral damage of macropolicy folly.” That’s great!

    James comments on the incentive to drive drunk would seem to say that people cannot respond to more than one or two margins at a time. Marginalist economics assumes that any open margin has the potential to influence human action and generally will when there are many actors on that margin.

    I should probably make a clarifying remark. I don’t think I denied that unemployment benefits encourage unemployment. Certainly, I did not wish to. I just don’t think that point ends the conversation. Mostly, I was just reminding everyone that the beneficiaries of unemployment relief in the US are not fat cats, but ordinary folks struggling to get along. Don’t we like markets precisely because we want to improve the lives of regular folks? Or is it all about champaign dreams and caviar wishes?

  8. James Pier Says:

    koppl said:

    “Don’t we like markets precisely because we want to improve the lives of regular folks?”

    We like markets because they are the best way we’ve found to solve the economic problem. It just so happens they are also the best way to “improve the lives of regular folks.” After some unknown length of time, unemployment benefits don’t do that.

    (Note: I maintain that the emergency room argument is a straw man. Maybe I’m not enough of an economist to take it seriously. If you are suggesting that there is even a remote parallel in terms of the magnitude of the incentive effects, you are way off base. If an incentive effect has zero effect on actual behavior, can it reasonably be considered an incentive? You’d be hard pressed to convince me that such is not the case with regard to the drunk considering getting behind the wheel and the ER.)

    When you argue that this extension of unemployment benefits “improves the lives of regular folks,” I think you underestimate the ‘unintended consequences’ of what has become an expectation of indefinite support. I have experienced this first hand–nothing focuses one’s mind like the need to feed his family.

    Why is it only this time around that these benefits are considered the only reason people aren’t starving for up to 3 years? Benefits used to run out at six months, and people didn’t die of starvation. They found work, and they took the work they could find. Then they bettered themselves over time, which was possible because markets create wealth, etc. etc.

    What makes a person productive–and that is the only reason they are worthy of employment–are skills, knowledge, attitudes, habits and behaviors, none of which come naturally. They must be practiced in order to keep them current. After 2 or more years of not having a regular job to go to, a decline in these human assets is inevitable. For those at the bottom rung of the employment ladder, this decline is a luxury they can’t afford.

    How long is long enough? How long is too long? I submit that, like the retirement age, the length of a given individual’s unemployment is more within his control than not. If a man is still not employed after a year, only rarely is that still ‘involuntary’ in any reasonable definition of the term.

    The availability of benefits serves as a significant disincentive to the difficult task of finding and procuring that next job. The marginal benefit of a modest increase in income does not compensate for the relatively huge expenditure of time and energy. Social stigma is non-existent anymore.

    The cost of minimal security is an unknown and unknowable potential. It reduces–likely on a lifelong basis for most–the baseline of that individual’s income trajectory. Unemployment compensation is a euphemism. What it is is “the dole.” It has the same moral and spiritual costs as undisguised welfare payments.

    Unemployment compensation is a reasonable accommodation for economic dislocations resulting from market adjustments. A reasonable time limit, known to all in advance, is the policy that makes the most sense for all involved. Repeated extensions, and the expectation of more, are no longer an authentic benefit to those who are able to work, but because of being paid to stay home are not willing.

  9. koppl Says:

    Well, I’d just like to go on record as holding that markets are better than control because they improve the lives of regular folks. If socialism would improve the lives of regular folks, I’d be a socialist. If a law requiring us all to wear silly hats would improve the lives of regular folks, I would lobby tirelessly for the silly hats law.

  10. Lord Keynes Says:

    All that activist government policy to stimulate here and bailout there creates uncertainty for business investors.

    I have no idea why you think this, and what evidence you could adduce for it.

    On the contrary, government interventions that prevented the collapse of the financial system and a depression have reduced uncertainty.

    What was the financial crises? A crisis of confidence in the banks and the presence of extreme uncertainty, in that banks doubted the solvency of other banks. That is why they stopped lending to each other, and the interbank lending markets froze up in late 2008.

    The interventions restored confidence and liquidity, and interbank lending resumed.

    Keynesian government interventions, by and large, serve to reduce uncertainty, not increase it:

    http://socialdemocracy21stcentury.blogspot.com/2010/12/risk-and-uncertainty-in-post-keynesian.html

    And, furthermore, if you really understand (as Ludwig Lachmann did) that we face fundamental uncertainty about the future, even when business expectations are strong and optimistic, why would the free market be a superior system? Why would there be any pattern/plan coordination in the face of uncertainty and shifting subjective preferences?


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  12. Pietro M. Says:

    As strange as it might appear, I tend to agree with Lord Keynes.

    Of course there is some regime uncertainty which LK doesn’t consider: in future taxes, in future sovereign default, and in the future sustainability of social-security, which was assumed to go in the red in a decade, but it is already deep in the red now.

    However, from a monetary and financial point of view, the Fed produced certainty, in the limits of the limited effectiveness of its standard (and newly created) facilities in the present conditions. It produced a kind of certainty which no one should produce in a market: the certainty that losses are not a private cost, and that taxpayers will foot the bill because our monetary benevolent dictator doesn’t want to face the reality of a widely distorted and unsustainable market structure which need a painful readjustment.

    This is certainty, because it is certain that interest rates will be zero as long as required to fill the mythological “output gap”, or that the worst assets the markets can create can be safely stored in the Fed’s vaults, or that “responsibility” is a word to be cancelled from the financial and economic dictionary, or that inflation is no longer a trigger for higher policy rates so it will be eventually tolerated.

    The essence of Bernanke’s policies is that the citizenry is too dull and stupid to face the truth regarding the state of the financial sector and the awful economic consequences of Greenspan’s utter lack of commonsense, principles, and guts.

    On this, we can be absolutely certain, and the Fed strongly reduced uncertainty. If it could also reduce structural problems instead of keeping them as they were and fostering more of them, we wouldn’t have any reason to be worried.

    The real problem is that the economy is too wrenched to sustain a further dose of perverse incentives, moral hazard, malinvestment, and financial folly, and so the Fed is inadequate in its task of producing Huxley’s soma for the real economy. It is not Bernanke’s fault if the economy is in such a state of disarray. He has tried to produce some in many ways.

  13. Mario Rizzo Says:

    Why isn’t the unextended length of unemployment insurance the correct amount of time in view of the idea that the recession is not the fault of the unemployed? Some people have been receiving benefits from me for two years.

  14. D.W. MacKenzie Says:

    1. See Stephen Nickel’s work on unemployment beneits in Europe.

    2. Were it not for those of us in the US that resist unemployment benefits, we would be closer to European levels of spending…

    3. I think the ratio of private to external costs is higher with the emergency room example.

    4. Is 80B$ really 2% of the budget? Is the Federal budget 400B$?

  15. D.W. MacKenzie Says:

    I missed a decimal point on my last post- I should not post until after some coffee… However, the other points stand. The 80 billion dollar figure is not fixed. Were opponents of U benefits to cave in, proponents would not stop at 80 billion.

  16. James Pier Says:

    Re Koppl –
    I may have been too quick in my remarks about why we like markets. At bottom, of course it is because they improve the lives of regular folks. But the socialist policy of unemployment benefits, when taken to the current extreme, reduce that improvement, as socialism always does, to pure materialism, and in so doing fails at even that. It is not that there are no jobs — it is that the available jobs are not attractive to those on the market, especially when their (acknowledged here) suffering is significantly buffered by UC benefits.

    This leads to Mario’s inquiry:

    It isn’t the correct amount for the great majority of people on the market after a year. Maybe you are too close to the situation to appreciate that there is a glut of talent in your field–I don’t know. A small number of those receiving benefits for two years have been actively seeking employment all that time. For those who have never been there, to apply for benefits, one must state that he has applied to at least two employers in the past week. This statement is to be made every week when application is made for the benefit. I am confident that an audit of current long-term beneficiaries would show not just “some gaming of the system,” but a systematic and willful fraudulence among the majority of beneficiaries. Nobody checks out the statement that the beneficiary has submitted applications. He also must state that he has not turned down suitable employment. Since he generally has not actually applied, this is usually not an issue, but only for that reason.

    I stand by my assertion that most of those unemployed over a year could be working if they wanted to, albeit not at their preferred position. The problem is that the wrenching adjustments required by the distortions created by statist policy mean precisely that most of the unemployed will not find that preferred position at that preferred salary. The sooner they are forced by reality to accept this fact, the sooner those human resources can begin to be productively allocated. The step back is not a permanent one if the individual invests the effort to continually improve his situation–as a market economy provides him ample incentive to do.

  17. James Pier Says:

    Observation: UC was designed, I think, at a time when most unemployed were laborers in the industrial sector, and just had to wait out a temporary layoff. This is no longer true in our economy. Because of the increased specialization today, many people will have to change jobs or fields or both to find work. Usually that will mean a step back in pay.

  18. James Pier Says:

    D.W. MacKenzie Says:

    December 9, 2010 at 5:08 am

    3. I think the ratio of private to external costs is higher with the emergency room example.

    The ratio of private to external costs has no bearing on the slightly inebriated driver’s decision to drive. If he gets as far in his thinking as contemplating the increased likelihood of being involved in an accident, he generally will make the error of thinking “not me.” If he really calculated that far, the anticipated pain and property damage would be sufficient to deter the foolish decision, before the “incentive” of reliable ER treatment ever entered into his thinking.

    The idea that the ER is an incentive to drunk driving is one of theory and hypothesis. Sort of like asking how many angels can dance on the head of a pin. Since it was introduced by Koppl into a policy discussion, which by definition is a practical one, to my mind it qualifies as a straw man. Enough on that, I’m sure you all agree.

  19. Current Says:

    I agree with Roger Koppl about silly hats, but I agree with James Pier about everything else.

    I live in Ireland, and before that I lived in Britain. These places have historically always had long-term dole. I’ve seen the effects of it and I don’t think it’s positive under any circumstances, even a recession.

    300$ may not be very much if you have a family. But for a single person it’s plenty.

  20. James Pier Says:

    Lord Keynes:

    Simply reverse the sequence of these two sentences and you are onto something:

    “I have no idea why you think this, and what evidence you could adduce for it.

    On the contrary, government interventions that prevented the collapse of the financial system and a depression have reduced uncertainty.”

  21. McGanahan Skejellyfetti Says:

    “But the socialist policy of unemployment benefits, when taken to the current extreme, reduce that improvement, as socialism always does…”

    You know, once you find someone calling every policy they don’t like “socialist” (or “fascist”), you know you can dismiss everything they say.

  22. McGanahan Skejellyfetti Says:

    “The sooner they are forced by reality to accept this fact…”

    What James means here is that these people must be beaten down by “reality” (i.e., unfettered capitalism) enough that they are stripped of all human dignity and will be willing to accept any wage offered by their capitalist masters for any sort of work at all.

  23. James Pier Says:

    McGanahan Skejellyfetti Says:

    December 9, 2010 at 12:13 pm
    “But the socialist policy of unemployment benefits, when taken to the current extreme, reduce that improvement, as socialism always does…”

    You know, once you find someone calling every policy they don’t like “socialist” (or “fascist”), you know you can dismiss everything they say.

    Fallacy: Poisoning the Well

    Description of Poisoning the Well

    This sort of “reasoning” involves trying to discredit what a person might later claim by presenting unfavorable information (be it true or false) about the person. This “argument” has the following form:

    Unfavorable information (be it true or false) about person A is presented.
    Therefore any claims person A makes will be false.
    This sort of “reasoning” is obviously fallacious. The person making such an attack is hoping that the unfavorable information will bias listeners against the person in question and hence that they will reject any claims he might make. However, merely presenting unfavorable information about a person (even if it is true) hardly counts as evidence against the claims he/she might make.

  24. James Pier Says:

    McGanahan Skejellyfetti Says:

    December 9, 2010 at 12:16 pm
    “The sooner they are forced by reality to accept this fact…”

    What James means here is that these people must be beaten down by “reality” (i.e., unfettered capitalism) enough that they are stripped of all human dignity and will be willing to accept any wage offered by their capitalist masters for any sort of work at all.

    An amusing attempt at ridiculing my position. I am not in a position to arbitrate, but I doubt it has succeeded at anything besides demonstrating intellectual laziness.

    Unfettered capitalism–if it were to exist–doesn’t beat people down, it creates opportunity, and it produces more and better goods and services at lower costs than any other system. We have no “capitalist masters,” but we do have state masters. The state does a great deal more to “[strip people] of all human dignity” than any entrepreneur or corporation or individual circumstance could ever do. One of the ways the state does this is to artificially introduce dependence on the state, through the provision of dubious benefits such as UC.

    As for the fear of unfettered capitalism, I believe it is unfounded. I surmise that most unemployed people have transferable skills and abilities and marketable qualities, whether they recognize them or not, that would be valued in the market should they apply themselves. They likely will have to accept a lower wage if they change jobs or fields, but not necessarily, and it doesn’t have to be a dramatic decline, nor is it usually a permanent one. Something on the order of, say, 15 to 20%, which in some cases would be very painful, but in others not as much.

    The bogeyman of “unfettered capitalism” which is expected to raise the specter of the Law of the Jungle among us humans is unleashed only when necessary to try to discredit an otherwise challenging argument against state intervention. Thus, Skejellyfetti commits the same offense he accuses me of. I will try to keep in mind that my use of the term ‘socialist’ is off-putting, although I believe my use of it was appropriate, and I don’t believe it fair to say that I have used it against ‘every policy I disagree with.’ Just this one so far.

    Skejellyfetti sets up a false dilemma, one that is often employed in arguments in favor of public provision of support: we must choose between the public provision of the “necessary” support and none at all.

    I enjoy challenges to my positions, and I hardly consider my arguments dispositive, but I do prefer to try to maintain a higher level of discourse. If I have failed in that, I apologize to the other readers.

  25. koppl Says:

    @ LK:

    Thanks for those thoughtful comments. I think Keynes was right to complain (in the GT) that economists hadn’t much investigated the state of confidence. This is a point very much in favor of Post Keynesians, who take the topic seriously. I don’t really agree with your take on these matters, but I do think it’s cogent, respectable, and so on.

    I have addressed these issues with the work on Big Players I’ve done with co-authors. And my old 1997 HOPE paper, with Bill Butos, on Keynes vs. Hayek. With Hayek, it’s all about evolutionary shaping. With Keynes, you have this chasm between long-term and short-term expectations. Keynes never asks what processes might govern the determination of planning horizons. If the future is so unknowable, why do we plan for it? Bill and I introduce the “horizon principle” to get at this infirmity in Keynes. You can find it in our reply to Burczak, ROPE 13(1).

    What do we do about uncertainty? One kind of approach emphasizes central management of some sort, be it central planning, Keynesian demand management, or central bank monetary policy. Another kind of approach emphasizes decentralized mechanisms on the grounds that central management requires too much knowledge in some sense. Clearly, I go more for that latter sort of perspective. That’s obviously a crude characterization, but I think there is a real difference the drives different opinions on how to deal with uncertainty. IMHO you end up with a less Keynesian and more Hayekian position if you take seriously evolutionary shaping and the epistemic symmetry between state and private actors.

  26. Glen Says:

    I think the problem is one of the marginal vs. inframarginal.

    Right now, the unemployment rate is about 9%. Say the natural rate is 5%. That means we’re looking at 4% excess unemployment.

    Now let’s suppose cutting off unemployment benefits would result in a one-quarter drop in excess employment — that is, the total rate would drop from 9% to 8%. That’s good. But it also leaves 3% (the difference between 8% and 5%) unemployed and lacking benefits. The former group is the marginal group; the latter is the inframarginal group.

    As I see it, Pier (and others) are pointing to the marginal group to justify cutting off unemployment benefits. Meanwhile, Koppl is pointing to the inframarginal group to justify extending benefits. They are both right.

    I suppose the argument could be about the relative sizes of the marginal and inframarginal groups. Maybe Pier thinks the margin is “all” and Koppl thinks the margin is “none.” But isn’t it reasonable to think the answer must be somewhere in the middle? Some of the unemployed could be employed if they just tried a bit harder (as Pier says), while others really have been screwed by our government’s lousy macroeconomic policies (as Koppl says).

    Ideally, we would like to extend unemployment benefits for the inframarginal group while cutting them off for the marginal group. But that would be quite a magic trick. So what is the second-best policy? I don’t have an easy answer.

  27. James Pier Says:

    Glen says:

    Now let’s suppose cutting off unemployment benefits would result in a one-quarter drop in excess employment — that is, the total rate would drop from 9% to 8%. That’s good. But it also leaves 3% (the difference between 8% and 5%) unemployed and lacking benefits. The former group is the marginal group; the latter is the inframarginal group.

    This is an important distinction, and it appears I have failed to communicate that I agree that it exists. I don’t suggest that every person who is unemployed longer than a year falls into the category of not having applied themselves sufficiently. I do contend that your marginal group is a good deal larger than your hypothetical 1/4. I’d guess it’s a majority, possibly a substantial one.

    We hear it all the time, but it’s true: incentives matter. It is no coincidence that the proportion of long-term unemployed is so much greater when their benefits extend beyond 99 weeks than when they were 26 weeks.

    The error that I believe the welfare state fosters is a perception of what sort of job a dislocated worker “should” be able to find. This attitude says we should sympathize with someone who can’t find work that is “suitable,” or that pays what he is accustomed to earning. That conception is a rationalist one, it is not consistent with decentralized orders, and it is a luxury that only those with capital, or with a claim on the state, can afford.

    Government-provided UC enables the indulgence of this concept, and in so doing retards adjustments in the allocation of human capital that would otherwise help return the economy to a sustainable growth trajectory.

    Unfortunately, we are addressing this program in isolation from the rest of the massive state apparatus. Rationalizing UC without similarly rationalizing other tangential factors would not have the intended effects of freeing the labor markets to operate and aligning incentives, while cushioning real, unavoidable suffering.

    What I believe we can say about UC as currently constituted, that is, as an entitlement for anyone with the necessary work credits, is that each beneficiary is treated like a number. This is clearly a disservice both to the beneficiary and to the taxpayer.

    There are many for whom extending benefits is nothing more than further enabling free-loading. There are fewer, but still many, for whom this is far from true. Government is ill equipped to identify which are which. There are programs to assist the unemployed in finding jobs, but having had direct experience with them myself, they leave much to be desired, even for the motivated.

    Had this problem been left to the private sector, to include voluntary organizations like unions and trade groups, charitable organizations, non-profit and for-profit enterprises, I am confident that free-loading would not be nearly as prevalent as it is. There would be far fewer long-term unemployed.

    These groups could be allowed to separate out the marginal from the inframarginal. Certainly this process wouldn’t be perfect, but it would be much closer to optimal than the entitlement approach that obtains today. There would be less atrophy of human capital and less wasted–and stolen–government spending. Solutions could address the whole person, not just his bank account.

    We market advocates ought to stick to our guns. Long-term involuntary unemployment is not caused by capitalism, it is caused and fostered by statism. To cede ground to liberalism on the issue of UC is to buy into their premise that markets are failing.

  28. koppl Says:

    What Glen said.

    Oh, except maybe two things:

    1) In my original post and at least one subsequent comment I did have language acknowledging that we are “somewhere in the middle.” It seems I was not clear enough, however. Sorry about that.

    2) I favor extending the benefits, whereas Glen seems to be agnostic. But I agree there is no easy answer that just trumps all opposition.

  29. Othyem Says:

    Well stated, James.

  30. Allan Walstad Says:

    Hi Roger. I’m late to this party, but a couple of thoughts anyway.

    If I understand Austrian business cycle theory, inflationism generates malinvestment in the boom, which has to be liquidated: the bust. That is, capital and labor must be reallocated into sustainable lines, in order that a sound recovery can proceed. The worst thing the government can do is inhibit this process. The existence of long-term, tax-financed unemployment subsidization obviously inhibits the reallocation of labor. It prevents the labor market from clearing. Whether the unemployed are at “fault” for losing their jobs is completely irrelevant, as it the fact that they are not “fat cats.” Entrepreneurs, investors, and bankers whose enterprises fail aren’t necessarily at fault or blameworthy either, nor should they be subsidized at taxpayer expense.

    I favor markets because a) they are productive, and production is the only possible basis of prosperity for all, and b) they are most consistent with individual liberty. You can make the economically less-successful a bit better off in the short run by robbing the earnings of their more successful neighbors and redistributing it; what does that sort of regime do to productivity long-term, and how does that affect the well-being of “regular folks?” You know the answer. Unemployment benefits are not a corrective measure, they are just one of a vast panoply of counterproductive government interventions in the market.

    And you know, whenever I hear something to the effect that, say, extending unemployment benefits “only” costs $80 billion, I think back long ago to Senator Everett Dirksen, who, in referring to government spending, said wryly, “A billion here, a billion there, pretty soon you’re talking real money.”

  31. Dave Pullin Says:

    May I ask those who are keen on incentives for the unemployed to find jobs a couple of questions? In a game of musical chairs, where 10 people play and there are 9 chairs, how much incentive does it take for all 10 to get a chair? Life threatening incentives?

    10 people are in a plane about to crash, but only 9 parachutes. That should enough incentive for everybody to get a parachute. How does that work exactly?

    Our capitalist system reacts to hard times with layoffs, heaping 100% of the problem on the 10% of the people least able to deal with it, just like island “civilizations” that force the weakest onto rafts to drown, in the face of a poor harvest.

    Like the game of musical chairs we remove a chair and then fault whoever doesn’t get a chair.

    All that happens if more people try harder to find a job when there are more people than jobs, is that the price of jobs rises – which is to say, wages fall. That’s what markets do.

    Wouldn’t it be better if those MOST able to deal with the problem had the incentive to fix it? How about a “life-threatening” incentive on businesses to create more jobs? Aren’t business the people with the capital, brains, entrepreneurial spirit … and the ones who pay themselves handsomely for their brilliance? Aren’t they the ones we should task to solve the problem?

    For the sake of a discussion, suppose that in order to fix a 10% unemployment problem, businesses were required to increase their employment by 20% and fined for each job they fail to create, at the rate of compensation for the highest paid employee?

    Of course there isn’t enough people to fill those jobs, so they’d have to compete for people, and some would inevitably fail, but that’s OK, apparently, if it’s the weakest who suffer, so why not if it’s the strongest?

  32. koppl Says:

    I like Dave Pullin’s musical-chairs analogy. Thanks for that Dave. Presumably, Dave does not want us to mistake his analogy a metaphor. No one needs to point out that the number of chairs is endogenous to the policy regime, for example. His point, I think, is rather . . . Well, *I* would point out that our policy regime is a job killer with or without an extension of unemployment benefits, so there there are not enough of those analogical chairs with or without the extension.

    @ Allen,

    You certainly offer thoughtful remarks, but (forgive me) I think you get off track quickly. Think about what you said: “The worst thing the government can do is inhibit this process [of labor reallocation].” Of course you don’t mean that literally. Randomly shooting people in the street would be worse than inhibiting the labor-market adjustment process. By using such categorical language, you saying the argument has only one side, not two. But there are two sides of the issue as Glen so eloquently pointed out.

    BTW: I don’t think anyone here used the word “only” to describe the measure’s cost. I specifically said the cost is “not chump change.”

    The current policy regime is full of unfortunate measures. If I got to design economic policy from zero, I might include unemployment insurance, but I probably would not. As Wonks seemed to suggest, it would probably be better to just rely on some sort of negative income tax program. Assure people of a minimum income in a manner that has the least affect on marginal incentives; other than that, let the chips fall where they may. Turning away from the blackboard, we find a policy regime chock-a-block with lousy policy measures. Why do we so uncompromisingly oppose the one such measure that reliably helps ordinary persons harmed by all the rest of our policy regime? Let’s have sound money before ditching a policy that mitigates the harm done to Americans thrown out of work by the state’s money mischief.

  33. Allan Walstad Says:

    Roger, I’m not entirely unsympathetic to the idea that as long as we are unable to eliminate some destructive government interventions, we may need to support other interventions that ameliorate the effects thereof. But as Mises pointed out, this has the makings of a vicious cycle, in which interventions cause problems that become the pretext for more interventions, on and on, Do we want to get off that train or not?

    The question politically, right now, is not even whether to eliminate unemployment benefits completely as a program, but whether to continue extending them beyond two years. The musical chairs analogy is not quite apt, because at reduced salary more “chairs” (i.e. jobs) could be available, assuming that multifarious government interference is not preventing the labor market from clearing. I wonder if you think the feds should subsidize underwater mortgages indefinitely and keep the housing market from clearing, too.

    As for a negative income tax program, it’s easy to predict how that would go, given all our past experience with government programs. As soon as it is in place, there will be continuous and irresistible political pressure to increase the level of the income floor (“a family of four can’t live on this”). Eventually you have another Social Security or Medicare on your hands, and no way out. Are people supposed to handle their medical expenses out of the negative income tax, or are taxpayers going to continue to fund separate medical aid programs? What about college tuition? Once you have a goodies wagon, pols score points by loading it with more stuff — extension of unemployment benefits being a case in point.

  34. Current Says:

    Roger’s initial claim was that unemployment benefit isn’t a significant disincentive to work. I strongly disagree with that, I have known many unemployed people and many long-term unemployed people. In Ireland where I live the dole is 196 euro per week which is quite generous. I know quite a few people who draw it rather than taking a job. That’s not just my interpretation of their actions, many of them will admit that that’s what they’re doing quite openly. Certainly it’s very difficult to take care of a whole family on that amount, but families get extra benefits too. But for a single person it’s not so difficult especially if you have some sources of side income. Two of my friends regularly travel all over Europe even though they’re on the dole. With modern prices of travel that’s possible.

    Some people seem to be saying that unemployment benefit isn’t a significant market intervention, and that as there are so many market interventions already we should accept it. I disagree firstly because it really is significant. It affects the decisions of everyone on unemployment benefit and everyone in a low-paid job who could be on it. It’s significant both in terms of it’s direct costs and it’s wider effects.

    Unemployment benefit is part of the cycle of interventionism that Mises discusses. It exacerbates the effects of poor monetary policy. There’s no need to disagree with monetary disequilibrium theory to hold this view. If dole is a fixed nominal amount then if there is deflation it will rise in real value and on the margin that will encourage more people to draw it rather than taking up work.

    Monetary disequilibrium theory doesn’t say that there is a fixed number of jobs in a recession. There isn’t a game of musical chairs. What it says is that when the demand for money changes then it causes less loss in output and less unemployment to adjust the supply. That’s true but it doesn’t mean that there’s no process of adjustment in the employment market. The problem is that when circumstances (such as central bank policy) dictate that an unexpected change in prices occurs then that process of readjustment is “asked to do more work”.

    As we’ve been discussing recently on Coordination problem in arguments with Rothbardian MET relies on relative adjustments taking place. Within an economy with a stable price level many relative adjustments can be going on. Some businesses and industries decline and lay off staff, while others are hiring. Economies rely at all times on this process occurring relatively unencumbered, apart from anything else that’s the only way local monetary equilibrium can be maintained.

  35. James Pier Says:

    If we concede that this program is required until the others are eliminated or “reformed,” then we have bought the farm. Attempting to identify which program is “the worst,” or which has the least vocal or least influential constituency, is a fools errand. Every program has its constituency, so every program is similarly “required” to keep (fill in the blank) from suffering (fill in the blank), which a civilized society absolutely cannot tolerate!

    This thread began with Roger asking why not extend UC benefits. I think Allan and Current both laid it out pretty well. (Let’s hope the Pullins of the world are declining in influence.) The 26-week policy, to my knowledge, had been acceptable before. Why not this time? Answer: because Democrats held all the cards. The cry of “this time it’s different!” is no more apropos here than it is with other phenomena of markets.

    Someone some time is going to have to say, “Enough!” If even assiduous defenders of markets are wringing their hands over the suffering of the unemployed, I wonder how the really wrenching changes that the US fiscal situation calls for can possibly be enacted, without our first having to go through a real full-out economic collapse. How much more blood-curdling will be the screams when it is the elderly, the infirm and the children whose benefits are being cut?

    Those in a position to influence political opinions–the idea-makers, to paraphrase Hayek–must redouble their efforts to educate opinion-makers, who will in turn educate the public, about the real costs of the interventions that have become part of the air we Americans breathe.

    I submit that most people are under the impression that UC is virtually free as far as they are concerned, so it is easy to support it when nearly everyone knows people receiving it. But it is not free, nor is any other entitlement. Once people begin to understand better what the welfare state costs them–opportunity, liberty, wealth, income, inflation, forgone innovations, cheaper and better health care, etc.–especially indirectly, then there is a chance that enough people will loosen their grip on what they think they are getting for free.

    We need a few Mises and Hayeks and Friedmans to convince the new Reagans and Buckleys and Cronkites and Clintons that doing the right thing economically is also the best thing politically.

  36. Pietro M. Says:

    This article talks about vacancies that are rising despite large unemployment. It is economically unsatisfactory, because openings data don’t enable to distinguish between structural and “moral hazard” unemployment.

    http://www.investors.com/NewsAndAnalysis/Article/556254/201012081850/Are-We-Subsidizing-Unemployment-.htm

    Can we provide a mechanism to screen structural (involuntary) unemployment from “being-paid-to-stay-at-home” unemployment? This would reduce costs, speed-up readjustment, reduce excess unemployment, and free resources to help those who need them. A win-win situation.

    Maybe it is sufficient to just compare the skills of the unemployed with the profiles of job openings and draw a dividing line.

    If there are one million openings in manufacturing, unemployment benefits for workers capable of doing those jobs can be quickly phased out. If openings are in nursing and education, construction workers are surely not free riding on the tax-payer.

  37. James Pier Says:

    I think Pietro has excellent thoughts, but again I think he gives away the underlying premise. The market operates to make the adjustments you are talking about–unless the state intervenes to distort the market mechanism.

    The cost to staying at home used to include not only the income one didn’t earn–all of it–but also the cultural stigma of being seen as not being responsible for supporting your family. The cultural element is now almost entirely gone, in part because the unemployed person is seen as nothing more than a victim of his circumstances, or worse, of the ravages of “unfettered capitalism.” Then UC removes (much of) the forgone income from staying at home, and voila! we have a voluntarily unemployed worker.

    If the same worker had the attentive and tailored assistance of a private enterprise, properly incentivized, to find him a new position, he would no longer be just a number on the UC rolls, or on the Labor Dept reports. If he had to go to a private charity for his family’s sustenance, but also received individualized support, encouragement, accountability, networking, training, etc., suddenly he is more a human being rather than a number. The process of accepting reality is not so terrible, and “waiting for things to get better” is not so comfortable. These alternative solutions are not unrealistic, but they have become “beyond the pale” because statism has monopolized the discussion.

    UC enables workers to take the attitude, while still employed, that they can rely on UC rather than set aside 10% for a rainy day. It allows them to take their time finding work, wait for something that isn’t going to materialize anyway (i.e. “the construction worker” — what makes him a construction worker? If the demand for construction workers is declining structurally, some construction workers must begin to see themselves in some other productive, remunerative role. That is not harsh or cruel, it may be better for him anyway.)

    The false dilemma that operates unchallenged–either the state or nothing keeps this poor sap and his family from life on the street–pervades our culture. It provides the invisible ocean for the ship of the state to float on.

    The remedies Pietro talks about, the mechanisms to match workers with open positions, must be market mechanisms. Government does a terrible job at it. It can be no other way. It can’t be made to happen. It must be allowed to happen. If it is allowed to happen, it will happen. It happens millions of times a year for people who don’t land on the unemployment rolls, and for people who are there only for a short time.

  38. James Pier Says:

    Addendum: It is not just that government does a terrible job at it, but also that it is not the province of government in a free society. Mises was right and Hayek was wrong: a little bit of intervention, sooner or later, becomes all-out statism.

  39. Seth Says:

    “Hospital emergency rooms encourage drunk driving. Should we therefore close hospital emergency rooms?”

    Who are we to judge whether we should have these things or not? I didn’t realize Austrians had the fatal conceit too.

    The key questions should be why we need to provide these things by force and what we gain and lose by doing so?

    The downside to providing anything by force is that we crowd out private solutions that could be far more effective for everyone. The upside is that we get to satisfy our own perceived compassion and peacock our IQ’s believing we can properly analyze a system that is far more complex than we’ll ever realize.


  40. “300$ may not be very much if you have a family. But for a single person it’s plenty.”

    Wow. I work full time and make slightly (slightly!) more than this per week. Robert De Niro’s character’s son from that movie about growing up in the Bronx is right: “The working man is a sucker.”

  41. Current Says:

    Dain,

    To be clear, I don’t know if unemployment benefit is $300 for single people in the US. Roger was talking about the US and he mentioned families, I assumed that the system was similar to Ireland and that that was the average would represent the single-person rate. In Ireland single people get 196euros per week, which is ~$259. It may be less for single under the US system though.

  42. James Pier Says:

    In the US,the benefit is based on a formula that considers income for the period leading up to unemployment, how long the employment was and so on. It varies considerably, but I think a ball park estimate is about half the income the worker is accustomed to. There is of course a cap, and it is rather modest. However, since there are no withholdings, on a cash basis the benefit does enable someone whose spouse is employed, for instance, to maintain something close to his lifestyle for some time. I have been acquainted through my work with a number of workers who openly admitted they were quite willing to accept UC and stay at home until the benefit had almost expired. Then he would start looking for a new job. This formerly was 6 months. Now, who knows?

  43. Econ Says:

    As unemployment is rising in this economy, many unemployed people are satisfied with the $300 they recieve every month. Many single people rather stay unemployed and recieve these benefits instead of searching for a job. However, some do try their best to find a job but in this bad economy it is very hard to find something stable.

  44. Loretta Says:

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