A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits. I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI. But perhaps it would be useful to explain my agnosticism.
UI has pros and cons. The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn. The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed. To me, all these pros and cons seem significant. I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.
So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks? If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?
It is plausible to me that UI benefits should last longer when the economy is weak. The need for increased aggregate demand is greater, and the impact on job search may be weaker. But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right. It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.
I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general. I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around." That issue is, as I tell my students, more a matter of political philosophy than it is of economics.
Saturday, December 4, 2010
Friday, December 3, 2010
MELBOURNE - lucianne, manchester lane, 12/03/10
I was peacefully photographing Lucianne when suddenly...
Thursday, December 2, 2010
Wednesday, December 1, 2010
A Mono Mandate for the Fed?
Along with Congressman Paul Ryan, economist John Taylor calls for a revision of the Federal Reserve's mandate:
Quantitative easing is part of a recent Fed trend toward discretionary and away from rules-based monetary actions. The consequences of this trend are clear: The Fed's decision to hold interest rates too low for too long from 2002 to 2004 exacerbated the formation of the housing bubble. And while the Fed did help to arrest the ensuing panic in the fall of 2008, its subsequent interventions have done more long-run harm than good....
Congress should reform the Federal Reserve Act, particularly the section of the act that establishes the Fed's dual mandate. The Fed should be tasked with the single goal of long-run price stability within a clear framework of overall economic stability. Such a reform would not prevent the Fed from providing liquidity, serving as lender of last resort, or cutting interest rates in a financial crisis or a recession.I am skeptical. If the Fed's mandate were different, monetary policy today might well be the same. That is, with inflation now below its target, the Fed could be pursuing QE2 even if it were operating under the proposed mono mandate. Looking ahead, the Fed believes that inflation too low, even deflation, is a larger risk than inflation too high, so it is engaging in expansionary policy to get inflation back on target.
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