A University of Chicago professor argues that help for the poor might be worsening unemployment
By now, we've all gotten used to the fights on Capitol Hill about extending unemployment benefits. Each time they're about to expire, Democrats line up to renew them. Meanwhile, at least a few Republicans rise up to object. Their argument: By writing checks to the jobless, we're making it less likely that they'll go out and find work.
This strikes many of us as ludicrous. Who, after all, would elect to stay unemployed? Who would rely on this dysfunctional government for a meal ticket? Still it's worth questioning assumptions. And a new working paper from University of Chicago economics professor Casey Mulligan is a good place to start.
According to Mulligan's research, the portion of America's social safety net devoted to working-age adults has swelled over the past few years. From 2007 to 2010 -- roughly the start of the recession through the early the recovery -- total spending has grown from $10,000 per needy adult, to $15,000. Unemployment isn't the only reason. Programs now have looser eligibility rules, opening them up to more folks. That jump has likely kept at least some people from going back to work, Mulligan writes.
But what is the "safety net"? It's not just the government. It's a patchwork of both public assistance -- like state and federal spending on Medicaid, food stamps, and unemployment benefits -- and private help -- like mortgage loan write-downs and credit card debt discharges by banks. These are all primarily available to low-income Americans, even if something like bank welfare represents a significant departure from how most of us think about "the social safety net."
The graph below summarizes the paper's findings. On the left, you see benefits available ($) to the underemployed. On the right, Mulligan introduces a nifty stat called the "self-reliance rate." That's the share of a household's old income that the safety net won't cover. At a self-reliance rate of 0.0, the safety net covers everything. At 1.0, the safety net covers nothing. For this chart, he assumes an income of about $36,000 a year. That's the average income for the bottom 90% of Americans, or roughly 132 million families.
The gist is that safety net spending is way up. Spending on unemployment insurance has quadrupled. Spending on food stamps (included in the "other" section) has doubled. Banks have forgiven more and more debt -- $140 billion worth in 2010. Medicaid, interestingly, has stayed about level, largely because its eligibility rules haven't changed.
What does this mean for a typical worker? Take somebody who made $36,000 in 2006. In 2007, he lost his job. That year, the safety net covered $10,000 of his former salary. In 2010, it covered $15,000. This individual saw the safety net "grow" by about $5,000 in three years.
That's a good thing. The U.S. needs more consumer demand, and this extra money is probably going straight back into the economy. But there is a downside to subsidizing underemployment: You encourage more people to stay underemployed.
"In a labor force as big as ours, it takes only a small fraction of people who react to a generous safety net by working less to create millions of unemployed," Mulligan wrote for The New York Times. "I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too."
Maybe so. But as Mulligan acknowledges, there is a powerful moral argument for the safety net. A study by the Center for Budget and Policy Priorities found that the number of Americans living in poverty grew just 0.6% from 2007 to 2010. Without the government's help, it would have grown by 4.2%. That's millions of Americans saved from going sick and hungry.