Rand Slaps Down Rand

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Rand Slaps Down Rand
By PAUL KRUGMAN
December 31, 2013
Update: A bit out of it this morning. Here’s Rand Ghayad’s piece.

Rand Paul has lately been citing Rand Ghayad’s research as a reason to eliminate long-term unemployment benefits. Rand Ghayad replies, “You know nothing of my work.” Which is true: as the good Rand documents, it’s clear that neither the bad Rand nor anyone on his staff read beyond the opening sentence or two.

And in general, the whole notion that the way to cure unemployment is to slash aid to the unemployed is an astonishing case of sloppy thinking allied to cruelty.

What Ghayad showed was that employers are reluctant to hire workers who have been unemployed for a long time. Paul takes this as evidence that we need to make long-term unemployment even harder to endure than it is now, to force workers to get jobs sooner. What’s wrong with this idea? It’s fallacious at two levels.

First, the notion that unemployment benefits have a major negative impact on job search is no longer supported by most labor economists. The papers right-wingers love to cite are, in general, two or more decades old; it’s now generally believed that much of the apparent effect of benefit expiration came from the way firms handled temporary layoffs, which are much less common than they used to be. Evidence from recent data shows much smaller effects.

Second, and at a deeper level: The level of unemployment in America today has nothing to do with job search or the lack thereof. Think about it. It’s possible (though dubious) that an individual worker who is currently unemployed may increase his or her chances of getting a new job by engaging in heroic efforts — making hundreds of phone calls per week, expressing a willingness to accept minimum wage or less, whatever. But none of this gives employers any incentive to create a new job. All this worker can do is move closer to the head of the line, getting a job that would otherwise have gone to someone else.

And the reason for this condition is that we have a depressed economy, where the number of jobs is limited by inadequate demand.

You can argue that in an economy nearing full employment, generous unemployment benefits can limit employment, because they may cause the economy to start experiencing inflation sooner than it otherwise would. Or, if you like, you can say that UI may raise the natural rate of unemployment. But none of that is relevant now.

What is relevant, and is the real lesson of Ghayad’s paper, is the strong possibility that prolonged economic weakness raises the natural rate, because the long-term unemployed get exiled from future employment. And what that says is that we need aggressive fiscal and monetary stimulus — exactly the policies Rand Paul crusades against.

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