How ObamaCare Wrecks the Work Ethic

Major subsidies and regulations intended to help the poor and unemployed were changed in more than a dozen ways after 2007. Economist Casey B. Mulligan, Professor of Economics at the University of Chicago, has analyzed the present economic situation of the United States in his recent book, The Redistribution Recession.

He argues that many of these changes were reasonable reactions to economic events, with the intention of helping people endure the recession, but they also reduced incentives for people to work and businesses to hire. He measures the startling changes in implicit tax rates that resulted from a labyrinth of new and expanded “social safety net” programs. He also reveals how low income borrowers can expect their earnings to affect the amount that lenders will forgive in debt renegotiation. In other words, if you earn more, creditors will be less likely to negotiate your debts downward. This has acted as a massive implicit tax on earning. He explains how redistribution in the forms of subsidies, taxes and minimum-wage laws profoundly altered the path of the economy and made the recent recession one of the deepest and longest in decades.

Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.

Professor Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening, if not causing, the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they actually increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession.

This whole scenario seems to indicate that Keynesian economics is a bankrupt theory and the massive "stimulus" bill in 2009 made the economy worse, not better?

Mr. Mulligan's thesis is that, in addition to thwarting recovery with unprecedented levels of spending, the Obama administration and Congress have made unemployment much higher than it might otherwise be. To take an obvious example, Congress increased the cost of labor—and thus decreased the number of jobs—by raising the minimum wage. (In fact, it has done so three times since 2007.)

On a grander scale, Mr. Obama and his policy advisers have added to government benefits in various ways—in essence paying would-be workers for staying out of the workforce. Mr. Mulligan estimates that about half the precipitous 2007-11 decline in the labor-force-participation rate, as well as in hours worked, can be put down to such misguided generosity.

By far the biggest source of the decline in work, Mr. Mulligan says, has been much easier eligibility rules for unemployment insurance, food stamps and housing aid. When subsidies for consumer-loan forgiveness are added in, government transfers almost tripled after 2007.

The Obama administration's theory is that government-supplied benefits will lead to more consumer spending and thus stimulate the economy. Mr. Mulligan, subjecting labor statistics to detailed scrutiny, shows, on the contrary, that government "help" can in fact be counterproductive.

The annual value in average benefits for not working rose from $10,000 in 2007to $16,000 in 2009. Such increases were inversely related to changes in average hours worked. On average, Americans worked 120 fewer hours in 2009 than in 2007—the largest contraction in work effort of any recession since the Depression. Since 2009, work hours and labor-force participation have remained at record lows even though the recession officially ended in June 2009.

It should shock no one that disincentives to work—e.g., two years of unemployment-insurance benefits instead of the usual six months—have made the unemployment problem worse. Mr. Mulligan stresses that, at a certain point, relief programs create a disincentive to work.

It is not only the unemployed who are affected. People working part-time or performing jobs that might allow for extra hours (and income) are discouraged from seeking more work. They easily grasp that, by working more, they will lose benefits and face the possibility of paying more in taxes. In short, the penalty for logging an extra hour on the job can exceed the income it brings in: If you make $30,000 a year and your pay from added hours rises to $33,000, you may well lose more than $3,000—the combined effect of additional taxes paid and foregone government subsidies. There are plenty of such cases, where, for low-income Americans, the marginal tax rate—as defined by taxes paid plus benefits lost on an additional dollar of income—can exceed 100%.

The ongoing consequences of added subsidies for the unemployed in 2010-12 explain why the labor market is not even close to a full recovery four years after the recession began.

All of the above have confirmed that higher payments for not working have made labor more expensive.

In 2009, it was argued that the primary problem with the economy was a reduction in demand—i.e., a lack of consumer spending—which caused businesses to cut production and lay off workers. However, during the worst of the 2008-09 troubles, most sectors of the business community increased their use of production inputs other than labor hours. “Production inputs” includes, mainly, the use of machines to do the work of former laborers. Of course, machines do not pay taxes; neither are they consumers. As a result, the use of machines and “other production inputs” do not help the economic situation of our country.

In short, businesses drove up productivity by shedding workers. Why? "Businesses perceive labor to be more expensive than it was before the recession began," Mr. Mulligan writes. The reason for the added cost was that easier requirements for benefits—even as the government was pumping "stimulus" money into the economy—unwittingly reduced the supply of workers. As output began to rise, firms hired fewer workers. National unemployment has stayed so high for so long because of the government's policies, not in spite of them.

By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less.

(This blog post was redacted from a book review by Steven Moore in the Wall Street Journal of 11/4/2012.)