Sunday, December 5, 2010

Greg Mankiw on Unemployment Insurance

His view is close to mine.  When I spoke to the reporter on Monday about this issue, I told her I didn't know what the right amount of time for unemployment insurance was and that both the pro- and anti- arguments have merit.

I also mentioned that those who failed to see both sides likely have a political agenda driving their views.  Mankiw, of course, says this much more eloquently than I do.

My Agnosticism about UI (by Greg Mankiw)

A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits. I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI. But perhaps it would be useful to explain my agnosticism.

UI has pros and cons. The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn. The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed. To me, all these pros and cons seem significant. I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.

So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks? If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?

It is plausible to me that UI benefits should last longer when the economy is weak. The need for increased aggregate demand is greater, and the impact on job search may be weaker. But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right. It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.
I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general. I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around." That issue is, as I tell my students, more a matter of political philosophy than it is of economics.