No fiscal cliff?

The New York Times 29 August 2012 Economix blog, "Is the Fiscal Cliff a Big Deal?" by Casey Mulligan is faulty, because it misses an Economics 101 opportunity cost issue.

...cutting unemployment insurance won't increase employment; in an environment where jobs are scarce, at most it will shift who has jobs...

Now it's easy to find non-economists making this mistake, or comparable ones. The Republican platform worries that trimming the Department of Defense's budget will cut jobs and hurt the economy, but turns around and claims that the roughly half of the 2009 stimulus package that added jobs somehow didn't help the economy. However, absent very large changes -- in an economy with a labor force of 155 million, a million jobs one way or the other is not a large change, however much it matters to those million people -- if such effects exist, they are symmetric.

What Mulligan assumes is that such issues never exist. The issue of unemployment is that people aren't looking for work. So cutting unemployment benefits will actually lead to more people working. First, unemployment benefits are not that generous -- if you're on a tight budget, you really need more income. But in today's context that's beside the point, because the underlying rate of unemployment is high. Corrected for changes in the working age population, the gap from where we were before the recession started is 14.5 million jobs.

Let me give an anecdote. My son has hunted for a regular job for a year, with no "bites" -- other than to become a low-level fast-food supervisor. He does better doing landscaping for neighbors. But a few years back he had opportunities, but wanted to finish his college degree. Most of his friends are in the same position, job-hunting, though they may have part-time jobs that provide some income.

Now an anecdote is not data; it only helps you think about what might be going on. But it does suggest that we look at overall unemployment. After all, if you want to argue that collecting unemployment checks is what is holding the economy back, you have to explain the source of a sudden shift in ethics in early 2007 that led 10-plus million Americans to decide that sitting home was a nice option. Instead, we can look at job losses and mass layoffs, both tracked by the Bureau of Labor Statistics. Their data also show a rise in those "working part-time for economic reasons", that is, people who have had their hours cut but want to work more. If the mass laziness story is true, then we shouldn't see this happening, either -- we'd expect to see the number of people happily accepting part-time work also rising. The data show they're unhappily accepting such work because the alternative, unemployment, is worse.

Mulligan's analysis of why in fact the "fiscal cliff" won't actually hurt growth isn't worth a "mulligan" -- this analysis is too sloppy to be anything more than ideology wrapped in professional credentials; the Times shouldn't grant him another shot.

Incentives do matter -- my paid employment lies in trying to teach students that -- but they aren't the only things that matters. In this case jobs simply aren't there. So if someone enjoying life on the dole gets a job, that means someone else won't have a job. Unless employment opportunities increase, it's a game of musical chairs. That reflects the second main thing that I am tasked with conveying to students, that they calculate opportunity costs appropriately, without double-counting or missing something. Mulligan totally fails to ask whether opportunities have shifted; he would earn a 50% grade in Economics 101.

...mike smitka...