David R. Henderson  

Henderson on Mulligan's Redistribution Recession

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Casey Mulligan's cleverly titled book, The Redistribution Recession, could have been one of the most important economics books in 2012. It makes the case that a major reason U.S. employment has been so low is that during the recent recession, the welfare state became so large. Specifically, Presidents George W. Bush and Barack Obama expanded the food stamp, unemployment insurance and other programs that made it less worthwhile for people, especially lower-income people, to work. If you were on such programs and started working, you lost benefits--some, such as unemployment insurance, in total and others, such as food stamps, in part. The result was what economists call "high implicit marginal tax rates." For every dollar earned, you not only paid payroll taxes, but also lost a fraction of the dollar in reduced government benefits. This, argues Mulligan, is a strong disincentive to work.

But a caveat to the reader: I say that the book "could have been" one of the most important economics books because, although Mulligan occasionally writes well and clearly, much of the book is too technical and hard to follow. Ph.D. economists who are up to speed on highly technical issues might be able to zip through the book; however, even though I am a Ph.D. economist, I am more of a generalist, and I found it hard slogging. There are parts of the book that appear to be important, but the way it is written obscures--rather than reveals--Mulligan's meaning. Typical readers of Regulation are probably better off reading my review of Mulligan's book than reading the book itself.


This is from my just-published review of Casey Mulligan's book. Although I have never met Casey, he was very gracious in helping me understand one part of the book. You might think that I didn't return the favor by being a little lighter on him, but I felt obligated to point out how difficult some of the key sections are to understand. I did understand a lot, however, and if you read my review, you'll see that I find persuasive, with some qualifiers, his case that disincentives contribute strongly to low employment.

I did make one mistake that Casey pointed out to me by e-mail yesterday: I blamed George W. Bush for the permanent expansion of food-stamp benefits that occurred on his watch. But Casey e-mailed me the following:

I also appreciate your note that readers will have to look elsewhere for a scorecard as to whether Bush or Obama gets more blame. Separate from the book, I have looked at the question a bit, and believe that your review erred in "With the Farm Bill of 2008, which President Bush signed, the government ...." I don't think Bush signed the Farm Bill. In fact, due to a technicality, the 2008 Farm bill may be the only law in history that a president vetoed TWICE. All of the links I could find related to this issue are collected in this blog entry.



COMMENTS (12 to date)

Or, listen to Mulligan discuss it with Russ Roberts at EconTalk.

If you want an overview of Mulligan's arguments, his recent EconTalk appearance is a good place to start.

http://www.econtalk.org/archives/2012/12/mulligan_on_red.html

Bostonian writes:

Mulligan writes interesting economics columns for the New York Times (!), where his use of microeconomic principles to explain human behavior perennially upsets hordes of NYT readers, as evidenced by the comments. It's pretty funny.

Daniel Kuehn writes:

Great to see it out!

Could you explain a little why you think the Keynesian model explains none of those four bullet points? It seems to me it explains three of the four bullets! The second is tougher to explain from a pure AD perspective, but it makes sense if we think about household bargaining models. At the beginning of the recession all families - single and married - get a shock to any wealth they had and an increased likelihood of unemployment in the near future. A single worker can't do anything about that if they're already working. A married family can start looking for a job to compensate. If the unemployment shock actually hits with equal likelihood, it's going to result in lower employment hours for the single parent than for the married couple.

That's not to say supply effects don't go on around these programs - of course they do. I'm just not sure why this challenges an AD story.

Daniel Kuehn writes:

I also think the seasonal employment argument is very weak. I talk a lot more about that here and here.


Keith E. writes:

There are two sides to the coin of government spending: 1) providing consumption funds for people thereby altering their incentives and 2) the opportunity cost of where that income might have been spent.

Borrowing savings to finance support programs reduces the saving pool available for capital investment. Not only do you reduce the incentives to work but you reduce the capital available to provide employment.

Has anyone looked at, or written about, the opportunity cost of the increased spending?

Daniel Kuehn writes:

Keith -
Much of Krugman's discussion of deficit spending has treated exactly those issues for the last five years.

This is also why our pure-consumption programs that work inter-temporally (SS and Medicare) rely on dedicated taxes rather than deficit spending. This point was tossed around a lot in the OLG/Samuelson/Buchanan/Lerner debate a couple months back that is well documented on Bob Murphy's blog.

Keith E. writes:

Daniel,

Thank you.

Sambou Wade writes:

As a senior student in economics, I have come to terms with the idea that economics is not an exact science because you can never predict human behavior. The government therefore has to step in and correct the mistakes caused by economic policies to protect and reinvest in to the least fortunate ie the poor and the unemployed. We don't have a police force to punish murderers because as people die others will be born but because taking lives of the weakest is wrong.

David R. Henderson writes:

@Sambou Wade,
You're right if you mean that you can never perfectly predict human behavior. But you can make predictions. For example, if he price goes up, then, all other things equal, the quantity demanded will fall.
Also, if you can't predict behavior, why do you think you can trust the government to step in and correct mistakes?

Bedarz Iliaci writes:

Sambou Wade,
The goal of sciences is to understand the phenomena and prediction is only one part of it.
Indeed, it takes some understanding to appreciate that human behavior is not predictable.

Evolution or astrophysics are also light on predictions but are no less scientific for that,


To understand means to know the causes of a thing and thus to leap beyond correlation to causation.

Bedarz Iliaci writes:

Consider the statement: the sun will rise tomorrow.

It is not scientific if we say so merely because the sun has risen a billion times in past. It is the characteristic of animal behavior to expect repetitions. The characteristic human rationality comes once we understand why the sun rises every day.

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