In Defense of Kelly Evans

Yesterday, I linked to a column by Kelly Evans where she points out something that has Nobel Prize quality insight to it:

More jobless benefits, more unemployment.

A likely rise in the U.S. jobless rate is the unfortunate reality of the government's move to fund extended unemployment benefits for another 13 months.

The effect probably won't be huge, but it will be significant. And it may well hamper any recovery in investor and business confidence...The extension of jobless benefits is likely to worsen that trend for at least several months. For one, individuals not actively searching for work or willing to take available jobs may claim they are unemployed in order to receive benefits. That could artificially boost the size of the labor force, which is used to determine the unemployment rate.

Another concern, as the San Francisco Fed notes, is that the extension of jobless benefits may "reduce the intensity" with which the unemployed search for work. Longer term, this could lead to a higher level of structural unemployment in the economy as workers' skills erode...

Out of the water to contest her thinking has come the CatFish, a.k.a Felix Salmon:

Last week, when I wrote my post on how to boost employment, the list started off unambiguously:

The first—and this can’t be stressed enough—is simply extending the federal unemployment extensions. As Menzie Chinn notes, the CEA has scored this, and the numbers are enormous: already, the program has increased the level of employment by 793,000 jobs. If the extensions are kept dead, there will be 593,000 fewer jobs in a year’s time than there would be if they were resuscitated, including more than 46,000 jobs in Florida and more than 26,000 jobs in Michigan.

This is not intuitive, especially to economist types who think that incentives matter and that at the margin, paying people to remain unemployed is not going to increase their chances of getting a job. But the fact is that those unemployment benefits are spent, and the extra economic activity naturally creates employment.

The CEA scored?#@!!

Is he talking about the same CEA that didn't see the housing bubble coming? That didn't see the internet bubble? That doesn't see the coming wave of inflation? A report that in itself doesn't have any data any older than 2008, that outlines no in depth theory, that in some cases references data that says the opposite of what the CEA is contending? That CEA?
Keep in mind that the CatFish once wrote:

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

How true! Mathematical models simply don't work in the field of economics where there are no constants, like there are in the physical world (such as ice freezing at 32 degrees). Thus the CEA stuff is edgy just on the basis of it attempting to do models without constants. Aside from the facts their models have never forecasted a major economic event in advance, ever. Nevertheless the CatFish plows on and then quotes Rob Valletta and Katherine Kuang, of the San Francisco Fed, who "did the math".

What do Vallett and Kuang say, if we decide to go along with their math game? Pretty much the opposite of what the CatFish is trying to prove:

Although economists have shown that extended availability of UI benefits will increase unemployment duration, the effect in the latest downturn appears quite small compared with other determinants of the unemployment rate. Our analyses suggest that extended UI benefits account for about 0.4 percentage point of the nearly 6 percentage point increase in the national unemployment rate over the past few years. It is not surprising that the disincentive effects of UI would loom small in the midst of the most severe labor market downturn since the Great Depression.

Despite the relatively minor influence of extended UI, it is important to note that the 0.4 percentage point increase in the unemployment rate represents about 600,000 potential workers who could become virtually unemployable if their reliance on UI benefits were to continue indefinitely.

He tries again with Peter Coy who "has taken a detailed look at the interplay between the two effects."

With due respect to Peter Coy, who I don't know and don't read, the man is a reporter who basically says in his column, that the CatFish quotes, that increasing unemployment benefits increases unemployment.  But he then throws out the Keynesian canard, with backup from a CBO report, that the spending by the unemployed will boost the economy. This is the beginning and end of Peter Coy's  "detailed look at the interplay between the two effects."
 With these absurd references, the CatFish then tries to sting Evans:

Which is why it’s very odd to find Kelly Evans, in the WSJ, writing the exact opposite.

Bottom line: The CatFish massages some quotes but in reality has nothing other than the Keynesian proclamation: "But it will increase spending!"

Of course, if you give people money they may spend it. And if those people are unemployed, why they just might spend it and wait until the money runs out before they start looking for a job. But most important, this money, the unemployed get, comes from somewhere. It comes from the rest of the workers are taxed, which means they have less to spend. Or the central bank prints the money, which is a hidden inflation tax on workers, since their money buys less because the unemployed are bidding against them with the newly printed money. Thus there is no net spending game. If, indeed, a consumer spending game is what you are trying to achieve.

The only further defense the CatFish can make is to swallow the entire Keynesian nonsense and spit out that the taxed will be the rich, and the rich will save the money rather than spend it, and that the unemployed will spend it. But savings means one of two things. It means the money is invested, which certainly means it is getting out into the economy, and investment spending creates even more products which raises every bodies standard of living. Versus consumption spending which by the very act of consumption shrinks the amount of goods available.

The other alternative for the wealthy is that they hoard the money and don't spend it. This only means that they are not bidding up prices against us and there is more available for the rest of us. In other words, our standard of living climbs.

None of this is a bad thing.

As for the unemployment situation, if the CatFish really thinks the unemployed are really going to sit on the sidelines and starve rather than not take any job that are presented to them if there are no unemployment benefits, then there's my fog machine in San Francisco I am willing to sell him. Or maybe he thinks wage markets don't clear and that supply and demand curves don't exist for wage markets. If so, I'm sure he'll supply us with some half-baked quote proving that's the case, pronto.