What Keynes knew but politicians don’t.
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“Anyone who is willing to work and is serious about it will certainly find a job. Only you must not go to the man who tells you this, for he has no job to offer and doesn’t know anyone who knows of a vacancy. This is exactly the reason he gives you such generous advice, out of brotherly love, and to demonstrate how little he knows the world.” |
So begins B. Traven’s 1927 adventure novel “The Treasure of the Sierra Madre,” the basis for the classic John Huston movie. Traven, it turns out, knew more about economics than any member of the modern G.O.P. caucus — a group whose members believe that cutting unemployment benefits and thus forcing people to seek jobs at all cost will somehow conjure more jobs into existence. |
Today’s column was about the failure of Senate Republicans and the Trump administration to come up with any meaningful plan to deal with the expiration of special pandemic aid to the unemployed. Much recent economic research has investigated how much effect this aid had on incentives of workers to seek jobs, with the apparent answer being not much. As I argued, however, this question is largely irrelevant: no matter how hard workers look, they can’t take jobs that aren’t there. |
But there is an objection one might raise: the number of jobs on offer isn’t a fixed quantity. You could imagine that desperate workers would be willing to accept wage cuts, and that reduced wages might induce employers to expand their workforces. This isn’t an argument politicians are likely to make openly — “Vote for Trump! He’ll slash your wages!” But might it have some validity? |
What Keynes pointed out was that while an individual worker may indeed be able to get a job by accepting a wage cut — because they underbid rivals for the job, or make it possible for the employer to underprice competitors — the story is very different if everyone takes a wage cut. Nobody gains a competitive advantage, so where are the job gains supposed to come from? |
It’s true that when an economy is suffering from persistent inflation, generous benefits can feed a wage-price spiral even when unemployment is high; this may have been a factor in the “Eurosclerosis” that afflicted some European countries in the 1980s. But this isn’t relevant to America in 2020. |
Indeed, if anything, benefit cuts that force workers to compete over scarce jobs can hurt employment, by causing deflation that worsens the burden of debt — a phenomenon my colleague and co-author Gauti Eggertsson calls the “paradox of toil.” |
Wait, there’s more. The Covid-19 recession, brought on by the necessary lockdown of high-contact economic activities, has been terrible. But it could have been much worse. Tens of millions of workers lost their jobs and their regular wage income — and the job-losers were disproportionately low-wage workers with little in the way of financial resources to fall back on. So absent government aid they would have been forced to slash spending, leading to a whole second round of job losses across the economy. |
Unemployment benefits, however, sustained many workers’ incomes, averting this second-round depression. So “paying people not to work,” as right-wingers like to describe it, actually saved millions of jobs. |
In short, things could have been much worse. And sure enough, it seems that they are indeed about to get much worse. |
More on the studies finding little disincentive effect from unemployment benefits. |
Last month federal unemployment benefits were $109 billion; most of that has now vanished, which is a huge hit to the economy. |
Remember how Obamacare was going to kill jobs? |
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