Economist Mulligan: Unemployment Benefits Prolonging Recession

Monday, 26 Nov 2012 01:32 PM

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Generous unemployment benefits and programs such as food stamps doled out under the Obama administration are prolonging the recession, said Casey Mulligan, an economics professor at the University of Chicago.

Benefits have gotten sweeter under President Barack Obama’s fiscal stimulus programs, costing the country more and at the same time keeping workers out of the labor force.

“It is time to reconsider the old-school economic idea that paying people to be unemployed reduces employment. The more we pay poor people, the more poor people we will have,” Mulligan wrote in a New York Post OpEd.

Editor's Note: The Final Turning Predicted for America. See Proof.

“The more we help people and institutions in financial distress, the more financial distress there will be.”

According to Mulligan, benefits have risen and have taken too many people out of the job market.

Food stamps are available to those who don’t need them, while help with housing and other needs have gotten so attractive they have essentially rewarded people for staying out of work.

“It’s true that the poor and unemployed tend to quickly spend what they have on basic needs. Yet Keynesians have gone further to claim that spending patterns of the poor are why redistribution raises total spending and thereby employment,” Mulligan wrote.

“Redistribution changes the composition of spending and employment in the direction of industries like discount groceries and low-cost retail that disproportionately serve poor customers and away from industries like, say, airlines. The stimulating effects of benefit spending for the overall economy is limited.”

In the end, the economy remains hobbled and more and more Americans remain out of the work force.

“Redistribution is not free. Redistribution depresses employment, aggregate spending and [gross domestic product], by implicitly punishing the successful and implicitly rewarding the unsuccessful.”

Unemployment benefits and other programs are under the Congressional microscope.

At the end of this year, many such benefits as well as Bush-era tax cuts are due to expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the country into a recession next year if left unchecked by Congress.

Should Congress fail, expect the United States to see credit ratings downgraded, noted policymakers say.

Standard & Poor’s downgraded the United States in 2011 when lawmakers waited until the last second to raise the country’s debt limit in a deal that did little to address longer-term debts and deficits.

This time around, other ratings agencies could follow suit.

“What’s worrisome is if we get over the cliff, we don’t have a deal — and the market doesn’t anticipate that we’re actually going to be so stupid as to go over the cliff — then I think you’ll see the market really crash,” Erskine Bowles, co-chair of the National Commission on Fiscal Responsibility and Reform, told CNBC.

“I think you’ll see the rating agencies downgrade our credit again. You’ll see Fitch and Moody’s join S&P.”

Editor's Note: The Final Turning Predicted for America. See Proof.

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