A Recovery Stymied by Redistribution

Public policy intended to make layoffs less painful actually made layoffs cheaper and more common.

Click here to read this WSJ article by Casey B. Mulligan. He is an economics professor at the University of Chicago economics. Excerpts:

"Major subsidies and regulations intended to help the poor and unemployed were changed in more than a dozen ways—and although these policies were advertised as employment-expanding, the fact is that they reduced incentives for people to work and for businesses to hire."

"But there is also the food-stamp program. It got a new name and replaced the stamps with debit cards. Participants are no longer required to seek work and are not asked to demonstrate that they have no wealth. Essentially, any unmarried person can get food stamps while out of work and can stay on the program indefinitely.

There were new mortgage-assistance programs. People who owed more on their mortgage than their house was worth could have their mortgage payments set at a so-called affordable level—in government-speak, that means that you pay full price for your house only if you have a job and earn money."

"All of these programs have in common that they, like taxes, reduce incentives to work and earn."

"Waves of new programs increased the typical marginal tax rate from 40% to 48% in two years."

"The more you help low-income people, the more low-income people you'll have. The more you help unemployed people, the more unemployed people you'll have."

"I met a recruiter—a man whose job it is to find employees for businesses and put unemployed people into new jobs—and he described the trade-off pretty well. Stacey Reece was his name, and he said that in 2009 his clients again had jobs to fill. But he ran into a hurdle he hadn't seen before. People would apply for jobs not with the intention of accepting it, but to demonstrate to the unemployment office that they were looking for work.

As Mr. Reece described it, the applicants would use technicalities to avoid accepting a position. The applicants would take Mr. Reece through the arithmetic of forgone benefits, taxes, commuting costs and conclude that accepting a job would net them less than $2 per hour, so they'd rather stay home."

"you could just as well say that this situation arises from the employer's failure to up his bid so that it competes better with unemployment benefits. My point here is not to assign fault but to illustrate that a lot of different actors contribute to market outcomes."

"the new and expanded programs for the unemployed and poor were subsidizing layoffs—they were making layoffs cheaper."

"the federal unemployment-insurance expansions were paid by taxpayers generally, which means that an employer could lay off as many people as he wanted without adding to his federal tax burden."

"Lay somebody off during the crisis and, for the first time, among other things, the employer wouldn't have to pay for former-employee health insurance."