The Great Recession officially began in the fourth quarter of 2007 and ended in
the third quarter of 2009. But more than three years later, despite massive federal
stimulus spending focused on offsetting the decline in American workers labor
earnings, employment rates are still substantially below pre-recession levels, as is the
income of the average American. While unrepentant Keynesians such as Paul
Krugman (End This Depression Now! [New York: Norton, 2012]) are writing
polemics that continue to argue that our slow recovery is the result of stimulus
spending that is insufficient to jump-start aggregate demand, Casey B. Mulligan,
a professor of economics at the University of Chicago, argues the reverse in this
tightly reasoned new book based primarily on his empirical research. He posits that
government policies in 2008 and 2009, rather than mitigating the consequences of a
recession triggered by the bursting of the housing-market bubble, turned it into the
In chapter 1, Mulligan poses two provocative questions: Would the U.S. recession
have been deeper if the federal government had not intervened in financial
markets and had not enhanced its safety nets for the unemployed and the poor?
Or were the labor market declines amplified and prolonged by federal government
actions? To answer these questions, Mulligan argues that it is necessary to identify
empirically the factors that account for the 7 percent decline in employment and the
10 percent decline in hours worked for Americans between 2007 and 2009.
To do so in the context of microeconomic principals of macroeconomics, he first
looks at the fundamentals that equilibrate supply and demand in the aggregate
labor marketworker productivity, peoples willingness to work, labor income taxes,
and labor market regulationsto account for this decline in employment before
turning to the usual suspects outside this market according to Keynesian analysis
drops in investment, financial deleveraging, a liquidity trap, and consumer confidence.
What Mulligan finds is a cautionary tale of the unintended consequences
of government policy gone wrong.
In chapter 2, he develops and uses his labor market model with aggregate timeseries
data on consumer spending, labor usage, productivity, and real wages. He finds
that although employment was down and labor productivity up in all industries except
for manufacturing, residential construction, and a handful of other businesses obviously
experiencing declines in their relative demand, employers were increasingly using factors
of production other than labor to produce their products. This empirical fact
suggests that employment was dropping not only because of declining demand for the
employees products, but also because employers were substituting capital and other
factors for labor. This surprising finding suggests that although a decline in aggregate
demand for goods and services was one of the reasons for the decline in labor, other
causes were also at play in most sectors of the economy. This fact is consistent with an
inward shift in the supply of labor to the marketplace during this period.
In chapter 3, Mulligan introduces the main culprit responsible for this supplycurve
shiftthe unintended consequences of increases in the social safety net that
substantially increased the marginal tax rate on work. In his model, Mulligan
operationalizes this force into changes in the replacement rate (the fraction of productivity that the average nonemployed person receives in the form of means-tested
benefits) and the self-reliance rate (1 minus the replacement rate), which is the
fraction of lost productivity not replaced by means-tested benefits.
His conjecture is that, in a reverse of government policies in the 1990s that made
work pay for single mothers by transforming welfare as we knew it into a program that
nudged single mothers off the Aid to Families with Dependent Children rolls and
into the workforce, temporary government program expansions to mitigate the
short-run consequences of unemployment and the bursting of the housing bubble
made a prolonged paid period of nonwork an offer that many Americans found too
tempting to refuse.
Mulligan identifies and incorporates the major expansions in eligibility and benefit
amounts for Unemployment Insurance and food stamps into an eligibility index that
shows that most of the 199 percent growth in these programs between 2007 and 2009
was due to these changes. He uses this growth rate in a weighted index of overall
statutory safety-net generosity to determine the degree to which it has influenced
overall employment. He does a similar analysis of the means-tested Home Affordable
Modification Program (HAMP), which facilitated substantial lender-provided discounts
on home mortgage expenses for unemployment insuranceeligible workers.
He finds that these market distortions that increased the marginal tax on work grew
substantially in 2008, peaked in 2009at almost triple their 2007 leveland then
modestly fell in 2010 to a level appreciably above the 2007 level.
In chapter 4 and then again in much more mathematical detail in chapter 5,
Mulligan simulates the degree to which increases in the marginal tax on work implicit
in the social safety-net expansions documented in chapter 3 account for the decline
in employment and hours worked between 2007 and 2009. He concludes that at least
half, and probably more, of the 10 percent drop in aggregate hours worked over this
period would not have occurred or, at worse, would have been short-lived if the safety
net had not been expanded.
Mulligan acknowledges that the bursting of the housing market bubble and the
resultant drop in home values and in stock market values more generally caused
labor hours to decline. He also agrees that the ensuing 2008 financial crisis probably
made the 2009 stimulus package and other legislation expanding safety-net eligibility
rules politically feasible. But his empirical evidence shows that the implementation
of these recession cures was primarily responsible for the Great Recessions
depth and duration.
Chapter 6 disaggregates the data and shows that drops in employment and
hours worked were not uniform but fell most heavily on lower-skilled groups as well
as (holding earnings potential constant) on the unmarried, the nonelderly, and,
especially, women. That is, it fell on groups whose incentives to work (Mulligans
log self-reliance index) were most affected by the expanded social safety net.
Mulligan conjectures that if economists were asked to predict the consequences
of such a social safety-net expansion before the recession, they might have predicted
that aggregate work hours would fall by 8 to 10 percent and would be centered
in these very groupsthe outcomes that did occur during the Great Recession.
Chapters 7 and 8 respond to Keynesian arguments that the fundamentals
equilibrating supply and demand in the aggregate labor market, which are stressed
in this book, do not hold during recessions. Hence, Keynesians would argue, the
counterfactual estimation strategy used here is irrelevant. Mulligan, however, uniformly
shows that labor supply mattered at the margin about the same in 2008,2009, and 2010 as it did in years prior to the recession, including in estimates
related to minimum-wage hikes.
Chapters 9 and 10 are periphery theoretical chapters. Chapter 9 investigates
more formally the degree to which incentives in HAMP affect banks decisions
to foreclose on underwater mortgages and on the decisions of the homeowners
who are paying off these mortgages to earn incomeas discussed in chapter 3.
Chapter 10 provides a model of the trade-off between safety and labor efficiency
in the governments response to the increase in perceived risk associated with events
such as the 2008 stock market crash and associated financial panic.
The Redistribution Recession is a serious, research-driven book by a currently active
academic research economist. Hence, it is completely orthogonal in style and content
to the Krugman polemic. For the nontechnical reader, this approach means that many
of the technical details of the work will be daunting. But Mulligan provides enough of a
heuristic explanation of his statistical methods and findings to drive home his points to
noneconomists while providing a much more nuanced explanation for academic economists.
He offers a controversial but plausible alternative perspective on the causes of
the Great Recession that is consistent with microeconomic foundations of macroeconomics
and anchored in sophisticated simulations of the role that the unintended
consequences of current policies played in the recessions depth and length.
Buy The Redistribution Recession: How Labor Market Distortions Contracted the Economy at Amazon.com for $35.63 (Hardcover)
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Volume 18 Number 2
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