Falling on Soft Times

Paul Jacob

12/9/2012 12:00:33 AM - Paul Jacob

December 9, 2012

Depressions are measured in terms of unemployment, monetary velocity, bankruptcies, and the like.

But perhaps they should be measured on the Mohs Scale.

These are hard times, we say. It’s not easy for some folks to find work. But the “hardness” isn’t quite so hard as you might think. The real trouble is, the times are too soft.

According to Casey Mulligan, author of The Redistribution Recession, there’s no great difficulty in explaining the length of the current depression, nor in explaining why the poor have participated so unevenly in what recovery has occurred. The system is rigged against them.

How?

By being rigged for them.

The welfare state has vastly expanded to serve the pocket books of the unemployed. “[P]eople don't suffer as much when they are not employed as they would have if they would have experienced this [economic downturn] ten years ago or five years ago or fifteen years ago. And when it’s less painful to be without a job there will be more people who are without a job.”

In other words, by the simple laws of economics (which boils down to the commonplace observation that people want to get as much for as little as they can), the more you give folks not to work, the less they tend to work. And it turns out that all sorts of programs have been increased in recent times. Unemployment insurance duration has increased, food stamp benefits have been increased, and then there’s the stuff that hasn’t even been on my radar:

They gave breaks to people whose homes are under water . . . mortgage breaks. But only if their incomes were low. . . . If you spent part of the year or even all the year unemployed, you'd get some help on your mortgage, but if you continued to work like you were before the recession, forget about getting any of that help. Another major one is they paid for the health insurance, 65 percent of the health insurance, for people who were laid off from their jobs. So, that's a big type of relief. It never gets cited when they talk about the average unemployment benefit. But you could have 65 percent of your health insurance paid for. You'd have to pay the other 35 percent. And 2-2.5 billion people took advantage of that expansion.

Of course, a lot of policy mavens don’t want to confront this. But there are no plausible arguments against economic laws influencing employment — as Mulligan makes clear in his recent interview with economist Russ Roberts:

When people plan to retire, which by all accounts is a voluntary transaction, they embrace and accept that their income may go down by 20 percent. But it's okay. They are not working. They planned for that. The most studious, forward-looking planners say: I don't need the kind of income that I had when I was working, when I am not working. A 10 or 20 percent pay cut is what I need. And with these expanded programs we had lots of people, millions of them, who got less than 20 percent pay cuts from being laid off.

And it is not only the case that government’s mostly well-intended aid to the unemployed has increased the longevity of this depression, it served as the causeof some of the unemployment, as well. It provided the trigger for layoffs. (Markets “force” employers to be compassionate, says Mulligan, even to the extent of timing layoffs to maximize employee returns via unemployment insurance. He bases this somewhat startling idea on prior research: “It’s not something I’ve invented.”)

At this point the reasonable reader might want to throw hands into the air. If the good things one wants to do makes bad things happen, what can we do?

The answer may be simple: Very little, if we want to do it well; or lots, and do it all badly, messily.

There are many reasons to believe that government intervention in society, whether it be by subsidy or regulation or gigantic transfer programs like Social Security, while alleviating small suffering here and there, or even constant, nagging suffering — and certainly unburdening us from some fears and anxieties — sets us up for huge hits. Inured to small pains, we are forced to endure bigger ones. Protected from small shocks — such as business failures — we are corralled into chutes that line us up for gigantic ones, later. The history of the recent financial implosion is a history of moral hazard leading up to it. Though those on the left blame a lack of regulation, several regulations, both new (Basel) and some old (the bond ratings requirement), triggered the debacle. And now we learn what some of us have long suspected: that the moral hazard of extended welfare state benefits trap the poor into dead-end dependency. And provide an additional trigger for depression.

This is no way to run a country.

Folks may think they’re being “generous” when advocating benefit extensions, but the long-run effects — heck, near-term effects — actually hurt the ones we try to help.

Is this a “hard” message? Not really. We just have to give up illusions. Adamantine hearts are not required. Indeed, softer hearts — Mohs Scale: 1, with all the grit and scratch resistance of talc — will thrive once no longer wasted on delusional politics and illusory policies.     (references)