After the close examination of Krugman’s argument about unemployment in the United States of America, it can be concluded that Caplan’s take on poverty programs is quite similar to what Krugman wrote back in 1994. They both speak about the distortion of incentives through the increase of welfare benefits. Krugman states that the reduction of the welfare programs will also reduce the natural unemployment rates. He puts it quite straightforward. If unemployment benefits are less generous and short-term, unemployed people will look for jobs more desperately. Caplan’s opinion on this matter is very similar, just phrased a little bit differently; when the government provides support to the unemployed, the supply of workforce falls, since people are less interested in working when most of their needs are already covered by poverty programs. The higher the benefits of unemployment, the easier it is to remain unemployed.
Filges, Geerdsen, Knudsen, and Jorgensen performed thorough research on this matter recently, and according to their result, “the prospect of exhaustion of benefits results in a significantly increased incentive for finding work.” Even today, the problem of the balance between social securities and work incentives is severe and often discussed in academic circles.
It is also should be noted that both Caplan and Krugman do not advocate for welfare cutting programs but support the different approaches to the welfare system. Caplan speaks about Earned Income Tax Credit as the solution to distortion of incentives because to receive this support. You need to be employed. Krugman sees the solution for this problem as a well-designed tax and transfer system. The Proper combination of tax and transfers, aimed at less fortunate groups of society, can minimize the distortion of incentives. As Andersen and Svarer noted in their work, better targeting of income transfers would provide for the optimal unemployment insurance.