Trapped in the Net

Welfare state increases marginal tax rates on working poor, study shows

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A prominent economist has found that expanding the social safety net, a key factor to President Barack Obama’s economic agenda, has nearly doubled job losses.

University of Chicago Prof. Casey Mulligan, author of the soon-to-be-released The Redistribution Recession, found that without the rapid increase of the social safety net during the economic crisis, employment per capita would have fallen by 4 percentage points, half the 8 point rate the U.S. experienced.

"The less painful it is to be without a job, the less reasons employees and employers have to work together to save a job," Mulligan said. "By making the safety net more generous, you’re going to have more businesses close up because of higher costs, and you’re going to see employees who will refuse to work if their wage is going to be less than their unemployment."

The stimulus provided an $80 pay bump in all food stamp benefits and allowed laid-off workers to remain on unemployment insurance up to 99 weeks, 26 of which are paid in large part by employers. The impact of such policies was immediate. In 2009, the average unemployed household took in $16,000 in benefits—a 60 percent increase from the pre-recession payout, according to Mulligan.

The benefits came at a price. The effective marginal tax rate for low-income households—the rate at which each additional dollar in income is taxed—rose from 40 percent in 2007 to 48 percent in 2009.

The increased costs to the labor market provided unemployed workers with little incentive to get back on their feet immediately, and deterred current employees from taking pay cuts in a down economy, according to Mulligan.

"When the White House pitched the so-called stimulus bill, they portrayed unemployment and food stamps as free and said they would make the labor market better," Mulligan said. "That is not only wrong, it is dishonest to those in the labor market who need jobs."

Other economists have come to similar conclusions. John Mueller, an economics fellow at the Ethics and Public Policy Center, found that the 8.2 percent unemployment rate would be 3 percent lower without the rapid expansion of the safety net.

"Any social benefits that are conditioned on being unemployed tend to ramp up unemployment," Mueller said. "It’s only rational that a worker will tend to look hardest when the benefits have run out; it’s not lazy, purely rational."

Republicans and Democrats have clashed over the safety net in several high profile cases over the past few years, including the most recent incarnation of the farm bill. On Wednesday, Democrats rejected Republican attempts to cut spending and restrict eligibility in the food stamp program.

"For somebody in this great country who’s paid taxes all their lives and worked all their lives and now needs help to put food on the table … they need to know that we’re going to be able to provide a little bit of temporary help," Senate Agriculture Committee Chairwoman Debbie Stabenow (D., Mich) said.

Nearly 80 percent of the $995 billion bill is dedicated to food assistance and nutrition programs over the next 10 years, according to the Congressional Research Service—a figure that has Republicans on the hill crying foul.

The food stamp program cost taxpayers nearly $81 billion last year, up from $38 billion in 2008, thanks in large part to relaxed admittance, which has allowed households to collect the benefits using only a pamphlet.

One Hill staffer said the bill does little to address "the biggest expansion [of costs] since the crisis" began.

"What has really driven that increase has been unemployment and previous to that categorical eligibility," he said. "Most states do not have a limit on assets … even if you have $50,000 in assets, you would be eligible to receive benefits, as long as you meet income requirements."

Relaxed eligibility has allowed many working households to join the ranks of food stamp recipients. A Department of Agriculture report found that "SNAP participation and unemployment rate were less closely linked over the last decade."

Only five states restrict eligibility for food stamp programs based upon assets. The lax standards have led to abuse, including $1.8 billion in estimated overpayments, according to the Government Accountability Office.

Michigan is the latest state to impose asset limits after it discovered that Lincoln Park resident Amanda Clayton continued to collect food stamps, despite winning $1 million from the state lottery.

"States were looking for ways to increase food stamp funding; they don’t have to pay for it, so it doesn’t affect their budgets," the staffer said. "You need to change the incentives for folks, so these programs don’t trap people in lives of dependency on the government and instead allow them to find well-paying jobs, so they can move up the ladder."

The battle over food stamps should focus more on these incentives than rhetoric, Mulligan said.

"The myth going around Washington is that the safety net expanded because of the bad economy—it expanded because the benefits got more generous," he said. "The guys who are proposing cuts aren’t trying to gut the program, they’re just trying to bring the rules back to 2007."

Mulligan’s book is due out in October, one month before Election Day.

Bill McMorris   Email Bill | Full Bio | RSS
Bill McMorris is a staff writer for the Washington Free Beacon. He joins the Beacon from the Franklin Center for Government and Public Integrity, where he was managing editor of Old Dominion Watchdog. He was a 2010 Robert Novak Fellow with the Phillips Foundation, where he studied state pension shortfalls. His work has been featured on CNN, Fox News, The Economist, Colbert Report, and numerous print publications and radio stations. He lives in Alexandria, Va, with his wife and three daughters. His Twitter handle is @FBillMcMorris. His email address is mcmorris@freebeacon.com.

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