Mooching the Safety Net in a Recession

I really liked this short post in Modeled Behavior a lot, mostly because I agree with it. Karl Smith takes issue with this part of Casey Mulligan’s assertion.

One interpretation of these results is that the safety net did a great job: For every seven people who would have fallen into poverty, the social safety net caught six. Perhaps if the 2009 stimulus law had been a little bigger or a little more oriented to safety-net programs, all seven would have been caught.

Another interpretation is that the safety net has taken away incentives and serves as a penalty for earning incomes above the poverty line. For every seven persons who let their market income fall below the poverty line, only one of them will have to bear the consequence of a poverty living standard. The other six will have a living standard above poverty

. . .

Of course, most people work hard despite a generous safety net, and 140 million people are still working today. But 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. I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too.

Mr. Smith ponders why, if the safety net is so great, are quit rates lower in a recession? Indeed! Further, on the benefits themselves, when I see low income shoppers using food stamps at my local grocery, I haven’t been thinking, “You know, this looks a lot better than my current living standard. Time to collect the hard earned rewards of others.”

The other important part of Casey Mulligan’s post, not cited in the link above, is this:

The safety net was not as effective before the recession began. As I explained in my last two posts, government assistance programs have not only supported more people but become more generous, thanks to changes in benefit rules since 2007.

I’m confused by Mr. Mulligan’s assertion that unemployment will only go down when we lower the safety net, because in one of his earlier posts he says this:

But an adjustment almost as important has occurred in the labor force itself: during the recession, people increased their propensity to take advantage of available benefits.

So, in good times, the unemployed and underemployed don’t seek to optimize their safety net benefits, but in recessions they do. This seems to contradict Mr. Mulligan’s earlier assertion that unemployment will not be reduced until the safety net is scaled down. When people feel economically secure, they don’t sit around and gobble down safety net benefits. When they feel insecure, they reach for what they qualify for. People would rather work than live on benefits, but they’d like to maintain their living standard no matter what, so they change their behavior to optimize social benefits when that part time job isn’t cutting it, their job security is threatened, etc.

Mr. Mulligan is right that 140 million of us may be working, but a part time job at Wal Mart is likely an involuntary, substantial downgrade. The expansion of benefits, and their acceptance by the qualifying, is in part a timely reaction to the well documented rise in involuntary part-time employment since the recession, and a frank assessment of household economics. The modern American family has both parents working full time in the majority of cases. If one is unemployed or working part time, such families are in great financial danger, and in such cases it makes sense to expand your budget constraints. It makes sense for the government to provide it. What doesn’t make sense is to say that getting rid of the safety net will shrink unemployment, because if the economy does get better and the past is any indication, people will stop optimizing their safety net benefits, something Mr. Mulligan himself has written about.

This entry was posted in Economics, Justice, Keynesian, Safety Net and tagged , , . Bookmark the permalink.

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