Monday, June 14, 2010

Do Economists Influence Public Policy?

We are in a deep recession and the President wants to create jobs. Most economists would say that allowing real wages to fall will help to stimulate such job growth. But, this article states that "The White House on Monday will issue new rules that strongly discourage employers from cutting health insurance benefits or increasing the costs of coverage to employees, administration officials say."

This is good news for incumbent workers who already have jobs but it will clearly have the unintended consequence of discouraging these firms from hiring new workers.

As economists, we have seen this before and provided are rating of two thumbs down. I'm thinking about the good work done on the unintended consequences of the Americans with Disabilities Act by Tom Deleire and by Acemoglu and Angrist in this JPE paper .

Recall their abstract:

"The Americans with Disabilities Act (ADA) requires employers to accommodate disabled workers and outlaws discrimination against the disabled in hiring, firing, and pay. Although the ADA was meant to increase the employment of the disabled, the net theoretical effects are ambiguous. For men of all working ages and women under 40, Current Population Survey data show a sharp drop in the employment of disabled workers after the ADA went into effect. Although the number of disabled individuals receiving disability transfers increased at the same time, the decline in employment of the disabled does not appear to be explained by increasing transfers alone, leaving the ADA as a likely cause. Consistent with this view, the effects of the ADA appear larger in medium-size firms, possibly because small firms were exempt from the ADA. The effects are also larger in states with more ADA-related discrimination charges."

Economists argue that "good intentions" are not sufficient --- we need the smart Obama economists to foresee the consequences of their policy actions before they take them and judge the costs of the policy factoring these medium term costs in as well. I view this new Obama regulation as a transfer from the unemployed and the firms' shareholders to the employed --- and I'm not convinced that this is a "pro-growth" strategy.