Debt and austerity
A Woman’s Place in the Church?

Soup Kitchens Caused the Great Depression

Jonathan B. Wight

The ethics of unemployment is tricky. By providing the unemployed with welfare benefits we clearly create a moral hazard: Econ 101 teaches us that humans are lazy and that work is drudgery. If I can free load off of government, why should I look out for myself?

This view of human nature is right in many instances, and it may create even larger inter-generational effects. But it is also dangerously incomplete. Many people—I'll go on a limb and say most people—derive some form of identity from their work, even if it is menial and hard. Being out of work is psychologically isolating and lowers self-esteem.

Moreover, the notion that most unemployment is voluntary (government welfare leading to high wages demands) just doesn't square with the facts. Look at low quit rates and low job vacancies during recessions. Krugman notes the absurdity of this view, equating it with the argument that "soup kitchens caused the Great Depression."

Krugman provides this thought experiment:

If you believe that the problem is excessive wages, you believe that the economy is fundamentally suffering from a supply-side constraint. In that case government borrowing is competing with the private sector for a limited quantity of resources, so big budget deficits should lead to soaring interest rates; meanwhile, because the supply of goods is limited, large increases in the money supply should lead to soaring inflation…. cuts in government spending should, if anything, be expansionary, because they both release resources to the private sector and make life tougher for workers who try to live on public benefits.

If, on the other hand, you believe that the problem lies in a shortfall of demand due to the zero lower bound [interest rate], you believe that government borrowing needn't drive up rates, because it puts unemployed resources to work; that monetary expansion won't be inflationary, because the money will just sit there; and that fiscal austerity will be strongly contractionary.

I leave the adjudication of these competing claims as an exercise for readers.

In the fifth year of feeling the repercussions of the Great Recession the market signals are quite clear: interest rates and inflation are low, low, low—indicating few supply constraints for capital and other resources. And profits are skyrocketing because productivity is soaring while wages are stagnant. Does that sound like workers exploiting management?


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