The Redistribution Recession: How Labor Market Distortions Contracted the Economy, by Casey B. Mulligan (Oxford University Press, 368 pp., $39.95)
The Internal Revenue Service has just had to deal with outrage over its targeting of conservative political groups; its also reeling from furloughs. Through the spring and summer, IRS employees have had to take five to seven days off without pay, thanks to the federal budget sequester imposed earlier in the year. Government-worker unions, including those representing the IRS rank and file, have taken to the streets to protest. One IRS worker said that the furloughs will force her to go on food stamps. Now, you may wonder: Do IRS employees really earn so little money that they need food stamps if they miss a few days pay?
But as University of Chicago professor Casey Mulligans shocking book, The Redistribution Recession, makes clear, going on food stamps is hardly unusual any more. With their loosened eligibility requirements and expanded benefits, food stamps and a host of other federal and state programs are undermining traditional incentive structures—and keeping the nations unemployment rate stubbornly high. A preeminent labor-market economist, Mulligan presents extensive research into these labor-market distortions—the way that policy interposes itself between prospective employers and employees—since 2008. Ordinarily, such heavily quantitative research is the province of economics journals. In this case, the findings deserve a broader audience.
Mulligan contends that since the Great Recession hit in 2008, the government has paid people not to work to an unparalleled degree—producing the weakest economic recovery since World War II. He calculates that benefits from federal, state, and local programs for those newly unemployed or suffering other misfortunes are now so lucrative that regular monthly wages often cannot compete. After 2008, average households began to collect anywhere from $227 to $2,190 per month from new welfare programs and from expansions of existing programs; most recipients qualified for benefits at the higher end of that range. The maximum, $2,190 per month, adds up to $26,000 a year, or 75 percent of what the average head of household, working for an hourly wage, earns working full-time. And this amount is added to the existing social-safety net.
A major piece of the new social-welfare framework is expanded unemployment insurance. In response to the Great Recession, Congress and the states increased the duration of unemployment benefits while lowering eligibility requirements. The result: a nearly 300 percent jump in spending on unemployment benefits. Another major component is the Supplemental Nutrition Assistance Program, or SNAP, for which, as with unemployment, Congress loosened eligibility requirements. Cars, savings, and college funds ceased to matter in determining qualifications. Instead, determinations were made solely on cash levels—if you could get your reported cash holdings down to 130 percent of the poverty line, you qualified, regardless of what non-liquid assets you might hold. Overwhelmed by caseloads, states instituted broad-based categorical eligibility that enabled anyone who got an explanatory SNAP brochure—which was virtually everyone who applied to the program—to get benefits. States also got waivers from the Department of Labors work requirements. From 2007 to 2010, SNAP households increased at a rate one-third greater than the increase in the poverty rate.
Additional outlays included those implicit in the broadening of Medicaid eligibility scheduled for 2014 that should increase patient rolls by 27 percent; payments for health insurance for the unemployed; and means-tested homebuyer credits, mortgage modifications, and mortgage-collection relief. All told, the federal government and the states plowed (and will plow) hundreds of billions into expanding the safety net. The effects have been perverse, Mulligan concludes: safety-net expansions have given people incentives to choose non-work over work. Americans total work hours have dropped 6 percent since 2008, a loss of $200 billion a year in output.
As Congressman Jack Kemp first argued in the 1970s, the more the poor, and particularly the unemployed, are eligible for benefits, the less remunerative low-level jobs will be. If, to take a job for $35,000 (a median head-of-household wage), you have to give up $26,000 in benefits, your marginal tax rate becomes an astounding 74 percent. Mulligan finds that the marginal tax rate change from 2007 . . . to 2009 . . . for the average marginal worker was about 10 percentage points. To put that figure in perspective: if 10 points were added to the bottom of the tax-rate code, it would represent the largest income-tax increase ever levied in one stroke on low earners.
Mulligan also eviscerates a central argument of President Obamas 2009 stimulus plan—that lower-income earners have a greater marginal propensity to consume. The assumption that some cash in hand would help the unemployed and others recharge the consumer economy explains all the new benefits and credits. This expanded safety net enabled the unemployed to recoup a substantial portion of their lost pre-2008 income, while also making it costly to aspire to the full amount—because going back to work would require forfeiting SNAP, unemployment insurance, and all the rest. Since their aggregate income was less than it had been, the anticipated spending didnt materialize. Businesses serving these consumers saw their sales flag and had to initiate layoffs. Labor unions found it difficult to justify agreed-upon wage levels to their membership, since non-work compensation had risen so substantially in the interim. The unions then sought even higher wages, and the greater costs to business translated to fewer jobs.
The Redistribution Recession should change the debate about the Great Recession and its aftermath. Mulligan concludes that half, and probably more, of the decline in aggregate hours worked between the end of 2007 and the end of 2009 would not have occurred without the expanded safety-net programs. Moreover, he tracks how the partial waning of the new programs from 2010 to 2012 correlated with increases in hours worked, employment, and output. We thus avoided a double-dip recession—but just barely.
It now seems clear that the government initiated something like another New Deal in 2009. In the 1930s, President Franklin Roosevelt enrolled the unemployed in the Works Progress Administration and the Civilian Conservation Corps to build scenic overlooks, grade roads, and collect folk music. After 2008, the government splurged on the unemployed again—but this time it got little in the way of public works or anything else. Stimulus defenders continue to insist that Obamas New Deal wasnt big enough. Thanks to Casey Mulligan, we know that it was far too large.