Somebody has to do it.
Somebody has to step forward to provide the theoretical rationale—on behalf of employers and their political representatives—to blame the victims of the Second Great Depression for their desperate plight.
And, right on cue, up steps neoclassical economist Robert Barro (with the assistance of fellow neoclassical economist Casey Mulligan and the approval of Greg Mankiw) to make the case for decreasing unemployment benefits in order to get folks back to work.
What’s interfering with a real recovery? Perhaps the Obama administration should stop casting blame elsewhere and examine the policies it has implemented to ease the pain of recession and falling housing prices. (Some of those, to be fair, were initiated under the Bush administration.)
Consider the expansion of social-safety-net programs, including food stamps, unemployment insurance, Medicaid (prospectively) and housing and mortgage programs. In a study published last month by the National Bureau of Economic Research, University of Chicago economist Casey Mulligan observed that, because these programs were means-tested (falling or ending as income rises), expanding them raised the effective marginal tax rate on labor income.
Specifically, Mr. Mulligan estimates that the effective marginal tax rate for low-income households went from around 40% in 2007, before the recession started, to about 48% in 2009, at the start of the recovery. Thus, while these programs may be attractive from the standpoint of assisting poor families, they dilute incentives to work.
To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.
If it’s all about incentives, then Barro & Co. have every reason to pander to employers and their political representatives in Congress and provide them the economic theory they’ve been looking for.