Summers Abandons His Economic Views – Editorial, Wall Street Journal
Even when we disagree with Larry Summers, we’ve long thought of him as a better economist than politician. But after reading his nearby letter to the editor, we may have to reverse our judgment. The senior White House aide is abandoning his former economic views to serve the Democratic Party’s current political purposes.
Earlier this week, we quoted an essay by Mr. Summers published in 1999 in which he explained that unemployment insurance creates an incentive for workers to delay going back to work. The share of America’s jobless out of work for 27 weeks or more reached a new record of 44.1% in March, and Mr. Summers’s past writing offers one likely reason.
The paragraph we quoted followed a subhead, “What Causes Long-Term Unemployment?” Here is how the passage reads in more complete form:
“To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.
“First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work. . . .
“The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.”
In his letter, Mr. Summers says we took his words out of context, but readers will note that he doesn’t deny that he linked jobless insurance with longer periods of joblessness. Mr. Summers skips over that point and instead resorts to that all-purpose economic explanation known as “aggregate demand.” In 2010 as opposed to 1999, the harmful incentive effects of extending jobless payments to an unprecedented 99 weeks don’t matter. He says the point now is to stimulate the economy by increasing consumer “demand.”
This is worth parsing because it gets to the heart of what’s wrong with Obamanomics. The Summers argument is that increasing unemployment insurance increases aggregate demand and thus reduces unemployment. This is because he and the neo-Keynesians believe that the impact on macroeconomic demand of this jobless spending outweighs the microeconomic harm on individual incentives.
In other words, if government pays people for not working, then more people will work. Subsidize unemployment and you will somehow get less of it. But if this were true, we could lower unemployment even more if we increased jobless benefits to $100,000 a year per person to cause an even greater surge in demand.
