Wednesday, April 15, 2009

Social welfare and macroeconomic policy

What is the social welfare function that is implicitly being maximised by macroeconomic policy makers? Brad Delong's repost of A Non-Socratic Dialogue on Social Welfare Functions made me think about a March post by David Andolfatto, Multiplier Mischief, regarding government spending multipliers estimated to be greater than 1.

[1] What does this theory predict concerning the optimal level of Y? Is more Y always to be preferred to less? When Y was expanding rapidly above trend during WW2, were people really made materially better off? Were people made happier by their long hours employed in military manufacture and European adventures? Did people really enjoy the rationing of foodstuffs and gasoline associated with the increase in G? Was the general destruction of capital (both physical and human) during WW2 really associated with increasing wealth levels? .....

[6] Should we follow Christina Romer's advice and take employment as a metric of economic welfare? Has she not studied economic theory? (Actually, I know the answer to this last question--it is no). I recall reading an article from the TASS news agency, published in 1957 that "the unemployment rate in the Soviet Union, as in previous years, was equal to zero." Should we seek "full employment" along the old Soviet model? Is this how we are to measure success?

Ignore the obvious straw men. While the empirical literature on happiness reports that unemployment has a negative effect on subjective well being (see Chapter 5 here for the psychological evidence, and here), no policy maker would argue that simply maximising employment will maximise social welfare. Policy makers also need to take into account the value of government spending, the benefits of job search etc. While it is likely that at high levels of involuntary unemployment increasing employment through government spending will increase social welfare, at some point the contribution is likely to become negative.


  1. Sinclair DavidsonApril 18, 2009 at 3:42 PM

    "no policy maker would argue that simply maximising employment will maximise social welfare."
    Actually Australian policy makers are arguing that exact point.

  2. Setting yourself manageable job search targets on a daily or weekly basis, and even scoring yourself to make sure that you stay on track, helps to make you feel in control of an area of life which might otherwise begin to feel totally unmanageable.

  3. ¿Do monetarist macroeconomic policies seek to maximize Social Welfare?, ¿how about keynesian policies?, ¿which one is better for attaining Social Welfare, keynesianism or monetarism?. Probably these are the relevant questions.