Did Workers Get Trapped in the Federal ‘Safety Net’?

Did federal expansion of the social safety net worsen the U.S. recession? University of Chicago economics professor Casey B. Mulligan believes it did, and his rigorously argued book from Oxford University Press makes a plausible case.

The book, The Redistribution Recession: How Labor Market Distortions Contracted the Economy, draws on Mulligan’s own empirical research on how major expansions in Unemployment Insurance, food stamps, the means-tested Home Affordable Modification Program, and similar programs increased the effective marginal tax rate on work. That increase, Mulligan argues, reduced employment and thereby turned what might have been a garden-variety recession into the Great Recession.

To be sure, other factors also contributed to elevated levels of unemployment and underemployment—Mulligan agrees, for example, that the fall in housing and stock prices contributed to the decline in hours worked. But he argues that the expansion of the federal safety net deserves most of the blame.

From 2007 to 2009, changes to eligibility requirements and benefits increased federal relief by 199 percent, and aggregate hours worked during that period fell by 10 percent. Mulligan estimates that at least half of the fall in hours worked resulted from the implicit tax increase caused by stretching the federal safety net. Lower-skilled groups, the unmarried, and especially women bore disproportionate shares of the reduced labor hours.

Reviewing The Redistribution Recession in the Fall 2013 issue of The Independent Review, Cornell University economics professor Richard V. Burkhauser calls Mulligan’s book “a cautionary tale of the unintended consequences of government policy gone wrong.”

Whereas Paul Krugman and Robert Reich have relied on polemics and literary sleight of hand to advocate for more federal relief and stimulus spending, Mulligan argues against such policies by employing technical rigor. If his analysis is correct, the expansion of the misnamed federal “safety net” has done far more harm than good, trapping the very workers it was supposed to have saved.