Before engaging in another round with Casey Mulligan, I’d like to say that, while I find most of his arguments implausible, I don’t think he’s silly for making them. Given the position he’s trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it’s much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate.
Replying to my criticism of his NY Times column, Mulligan suggests that I should have read his book. Perhaps so, but the column is presented as a critique of Krugman’s book, not a plug for Mulligan’s, and I responded in that light. His latest post mentions a couple of points where he draws on the book, but for the moment I’m going to continue to rely on data published elsewhere.
Mulligan responds to my points in reverse order, which makes sense, because his response to my central point is by far his weakest. The big difficulty for an explanation of post-2008 unemployment based on US welfare policies (unemployment insurance and food stamps) is that many other countries with radically different labor markets and policy responses experienced a big and sustained increase in unemployment at exactly the same time, following the global financial crisis of late 2008. In particular, lots of countries introduced austerity policies involving sharp cuts in the kinds of benefits Mulligan is criticising. Mulligan’s response to this evidence is handwaving. First he says that I haven’t calculated the implied changes in marginal tax rates, although its pretty obvious that most of them will be reductions. Then he resorts to US exceptionalism, saying
Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.
That’s pretty startling for someone representing a school of thought which usually treats economic laws as having the same universal applicability as those of physics.
To try and make sense of an argument like Mulligan’s you’d have to start with the financial crisis as a global shock, then claim that, if only governments had sat on their hands, recovery would have been rapid. Instead, the argument would run, governments acted to alleviate the lot of the unemployed and thereby made things worse. That would be a coherent explanation for simultaneous and sustained increases in unemployment – the only difficulty is that it’s directly contrary to the facts.
It’s worth making the distinction here between changes and levels. Lots of European countries have high marginal tax rates and generous unemployment benefits, relative to the US. But, in many of the worst hit countries, benefits have been greatly reduced. By contrast in the US, benefits are very low but at least some have been increased. If, like Mulligan, you want to argue in terms of changes, then Europe should have seen reductions in unemployment (which was previously higher than the US). In reality, there is very little correlation between labor market policies and changes in unemployment. What has mattered has been exposure to the initial financial sector shock and/or subsequent austerity policies, exactly as Keynesian analysis would predict.