Sunday, March 7, 2010

Whoops! Paul Krugman Contradicts, Well, Paul Krugman!

In my recent post about Paul Krugman's attack on Jim Bunning, it seems that Krugman has managed to contradict himself regarding the effect of generous unemployment and welfare benefits on unemployment. The source is the textbook that he and his wife, Robin Wells (who, according to the recent fawning piece in the New Yorker, spices up the partisan lines in his columns). Take this line, for example:
Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker's incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of "Eurosclerosis," the persistent high unemployment that affects a number of European countries.
However, the new, unimproved, hyper-partisan Krugman apparently now believes this:
What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.
Of course, that depends upon which textbook one uses. If one uses the text by Krugman and Wells, then the Krugman/Wells contention in the column is, well, wrong.

(Hat tip to Bruno De Gourville)

2 comments:

sean said...

I suppose Krugman would point to this part: "when the economy is deeply depressed," and say he was referring to the multiplier effect to reduce cyclical unemployment, while his textbook reference refers to structural unemployment.
He does seem to imply that there is unanimous consent for this aspect of Keynesian economics amongst economists, which is utterly fallacious (and more so with each day).
"A lack of sufficient demand"--I suppose I could claim my business, Dog Feces Inc, which sells dog feces and dog feces accessories, is going under because a lack of sufficient demand.
And as usual, he's also parading under the label of noble-prize winning economist while spewing partisan nonsense.

Richard said...

Sean,

I was thinking the same thing when I first read Dr. Anderson's post. Sure enough, Krugman has since posted a response to 'stupid' critics who have called him out on his contradiction; his textbook answer does not apply to recessions (depressions).