The economic rocket scientists at the Wall St. Journal are saying that Paul Krugman is a hypocrite for saying that unemployment benefits won't raise unemployment "but his textbook says they will." Krugman responds with a rhetorical question: Are they really that stupid? He explains:
But anyway, maybe this is a good time to explain the difference between determinants of the NAIRU — the minimum rate of unemployment consistent with a stable inflation rate — and the determinants of the unemployment rate at a point in time.
So: there are limits to how hot you can run the economy without inflationary problems. This is usually expressed in terms of a non-accelerating-inflation unemployment rate; yes, there are some questions about whether the concept is quite right, especially at very low inflation, but that’s another issue.
Everyone agrees that really generous unemployment benefits, by reducing the incentive to seek jobs, can raise the NAIRU; that is, set limits to how far down you can push unemployment without running into inflation problems.
But in case you haven’t noticed, that’s not the problem constraining job growth in America right now. Wage growth is declining, not rising, and so is overall inflation. A wage-price spiral looks like a distant dream.
What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant. That’s why comments by the likes of Sen. Kyl are so boneheaded — anyone who thinks that high unemployment in the first quarter of 2010 has anything to do with workers getting excessively generous benefits must not get out much.
And the truth is that unemployment benefits are a good, quick, administratively easy way to increase demand, which is what we really need. So right now they have the effect of reducing unemployment.