Bob Lucas is interviewed in the Journal.
In it he refers to his speculation that ObamaCare is holding back the US economy and Ed Prescott’s work on Europe. The writer Holman Jenkins, pens this
For the best explanation of what happened in Europe and Japan, he points to research by fellow Nobelist Ed Prescott. In Europe, governments typically commandeer 50% of GDP. The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households. "The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard," says Mr. Lucas. "And it’s really hurting them."
When you read this its really hard to know what was said. And, I don’t actually know what Lucas thinks on this point.
His quoted words
The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard
Are logically consistent with the Prescott models I have seen and with what I would think of as a serious treatment of tax and spending effects.
What Jenkins adds, however, is not
The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households.
I don’t want to turn this into another widely ignored post on the separable log utility function.
Let me just say in human terms, what the basic models say is that giving people free stuff makes them work less. Taxing them more does not make them work less.
In real life what you would be saying is there are some people who are only working so that they can get health care. If you give them government health care they will stop working. This makes logical sense and you can probably find this person. I will not call out on my blog but I could produce this person in a lecture hall tomorrow if I had to.
It is much more difficult to produce the person who will work less because of an increase in marginal taxation. It may sounds trivial but I suggest the exercise of actually attempting to produce the individual. The difficulty of such exercises has led people to suggest that well perhaps there is a general sense of peer work levels that adjust over time to group wide incentives.
Which is of course, one story.
Another is that it’s the benefit side of the equation which is what simple models and your lying eyes tell you it is. Does anyone doubt that they can find the person who started working because of a decrease in the dole? Did they need a complex peer group effect. Or did they simply find that they could no longer afford both rent and breakfast.
For now, I am going with the theory that it’s the benefit side.
However, think of what you are say, because it puts into contrast what I think the actual tradeoff is.
You give someone health insurance and because of that they feel they no longer have to work and so they quit. GDP is going to go down. Someone is going to go without the goods and services produced by that person. The extent of the market will have decreased meaning that the return to research and development will have fallen, etc.
Those are some unfortunate things.
On the other hand, this person was in almost by definition desperate straits. He or she didn’t want to work for some reason. Maybe they want to stay home to raise their child. Maybe they had a sick relative and wanted to be with them more. Maybe they were just old or young and didn’t want to be in the labor market.
However, they got in the labor market because they needed health insurance. Giving them government health insurance eases their burden. It places a burden on someone else and lowers the total productive capacity of society, but it eases the burden of the affect individual.
Now is that a good tradeoff? Maybe yes, maybe no. However, it’s the one that has a lot of power.
You are going to see this same effect with single moms. If you pay single moms to stay home with their children a huge number of them are going to take you up on that offer. If you take that away, millions of those same women will go to work.
However, they went to work at the cost of raising their own child. Is that good? There are clear arguments on both sides, but I think that is the tradeoff.
In any case what this would portend is lower full employment GDP. And, indeed Germany is much closer to full employment than the US but also has a lower per capita GDP.
What is not clear is why it would get us high unemployment and persistent unemployment.