Bookshelf: Failure To Stimulate ~~ The Obama administration has thwarted recovery with unprecedented levels of government spending.
November 4, 2012, 2:21 p.m. ET
By Stephen Moore
What if Barack Obama has it all wrong when it comes to the economy? What if Keynesian economics is a bankrupt theory and the massive "stimulus" bill in 2009 made the economy worse, not better? Those are among the questions that Casey Mulligan asks in "The Redistribution Recession," a biting analysis of our current economic malaise.
Mr. Mulligan's thesis is that, in addition to thwarting recovery with unprecedented levels of spending, the Obama administration and Congress have made unemployment much higher than it might otherwise be. To take an obvious example, Congress increased the cost of labor—and thus decreased the number of jobs—by raising the minimum wage. (In fact, it has done so three times since 2007.) On a grander scale, Mr. Obama and his policy advisers have added to government benefits in various ways—in essence paying would-be workers for staying out of the workforce. Mr. Mulligan, an economist at the University of Chicago, estimates that about half the precipitous 2007-11 decline in the labor-force-participation rate, as well as in hours worked, can be put down to such misguided generosity.
By far the biggest source of the decline in work, Mr. Mulligan says, has been much easier eligibility rules for unemployment insurance, food stamps and housing aid. When subsidies for consumer-loan forgiveness are added in, he notes, "government transfers almost tripled after 2007."
The Obama administration's theory is that government-supplied benefits will lead to more consumer spending and thus stimulate the economy. Mr. Mulligan, subjecting labor statistics to detailed scrutiny, shows, on the contrary, that government "help" can in fact be counterproductive.
The annual value in average benefits for not working rose to $14,000 per recipient in 2011—the high was $16,000 in 2009—up from $10,000 in 2007. Such increases were inversely related to changes in average hours worked. On average, Americans worked a stunning 120 fewer hours in 2009 than in 2007—the largest contraction in work effort of any recession since the Depression. Since 2009, work hours and labor-force participation have remained at record lows even though the recession officially ended in June 2009.
The Redistribution Recession By Casey B. Mulligan
(Oxford, 351 pages, $39.95)
One can quibble with some of Mr. Mulligan's estimates. For instance, his claim that half the decline in hours worked is due to expanded welfare programs may well be too high, and he doesn't seem to fully take into account the rapid decline in job openings during the worst months of the recession. Still, it should shock no one that disincentives to work—e.g., two years of unemployment-insurance benefits instead of the usual six months—have made the unemployment problem worse. Mr. Mulligan stresses that, at a certain point, relief programs create a federal restraining order against working.
And it is not only the unemployed who are affected. People working part-time or performing jobs that might allow for extra hours (and income) are discouraged from seeking more work. They easily grasp that, by working more, they will lose benefits and face the possibility of paying more in taxes. In short, the penalty for logging an extra hour on the job can exceed the income it brings in: If you make $30,000 a year and your pay from added hours rises to $33,000, you may well lose more than $3,000—the combined effect of additional taxes paid and foregone government subsidies. Mr. Mulligan finds plenty of such cases, where, for low-income Americans, the marginal tax rate—as defined by taxes paid plus benefits lost on an additional dollar of income—can exceed 100%.
This inverted dynamic didn't end with the recession's end in 2009. The ongoing consequences of added subsidies for the unemployed in 2010-12, Mr. Mulligan writes, "explain why the labor market is not even close to a full recovery four years after the recession began."
During normal economic times, Mr. Mulligan's arguments wouldn't be especially controversial, but they are now. Mr. Obama's policies have been built on the idea that the economy's troubles are so severe that the time-tested laws of supply and demand—of incentives and disincentives—are somehow irrelevant. But of course they aren't. And the stimulus only made such miscalculation worse. Higher payments for not working made labor more expensive.
In 2009, it was argued that the primary problem with the economy was a reduction in demand—i.e., a lack of consumer spending—which caused businesses to cut production and lay off workers. Mr. Mulligan shows that, during the worst of the 2008-09 troubles, most sectors "outside of hard-hit construction and manufacturing . . . increased their use of production inputs other than labor hours."
In short, businesses drove up productivity by shedding workers. Why? "Businesses perceive labor to be more expensive than it was before the recession began," Mr. Mulligan writes. The reason for the added cost was that easier requirements for benefits—even as the government was pumping "stimulus" money into the economy—unwittingly reduced the supply of workers. As output began to rise, firms hired fewer workers. National unemployment has stayed so high for so long because of the government's policies, not in spite of them.
By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less.
Mr. Moore is a member of the Journal's editorial board and the author of "Who's the Fairest of Them All?: The Truth About Opportunity, Taxes, and Wealth in America" (Encounter). |
