If The Safety Net Is So Good Why Is The Economy So Bad?

by: Modeled Behavior

By Karl Smith

Casey Mulligan says:

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.

I assume – based on Casey’s general thesis – that his point here is that the expansion of the safety net is a major cause of the decline in employment.

A core problem with this interpretation is that it models the decline as resulting from an expansion in individual budget constraints; now you can work less and avoid poverty were as before you couldn’t.

Yet, an expansion of your budget constraint is an unambiguously good thing. If that’s the case the people are not not working because “the economy is bad”, they are not working because the economy is awesome.

Yet, they don’t talk and act like that. They talk and act as if something bad has happened; as if they are more afraid of their economic future than they were before; as if they are afraid to spend; as if they are afraid to quit their jobs.

Indeed, the quit data shows a sharp decline in quits associated with the recession. One would expect an expansion of the budget constraint to be associated with an increase in quits.

It also knits in with an important point that can help economists stay grounded and not get lost on unproductive tangents: The economy is not bad because some statistics show anomalous patterns. The economy is bad because if you ask Joe on the street, how’s the economy, he will say, “it sucks.”

That is the alpha and the omega of a bad economy. A bad economy is an economy that makes people feel bad.

We could go on a long discussion about how badness is fundamentally a property of human minds and not of external real world phenomena. That a thing unto itself – including the entire global economy – is nothing more or less than a particular arrangement of sub-atomic particles.

But, even without that I think we should all be able to get why human emotion is the ultimate arbiter here and why it’s a key piece of evidence in trying to understand what’s going on.

If people are telling you that their current situation sucks that’s a strong clue that you should be looking for something reminiscent of a contraction of the choice space.