Thursday, November 22, 2012

Redistribution Economics

Casey Mulligan, an econ prof at the University of Chicago, has provided a fascinating analysis of why so many people have given up looking for work in the Obama economy.  His new book, "The Redistribution Recession," lays out the "high marginal tax rates" that the unemployed and the poor in general face in the Obama economy.

Here's an example you might not have thought about.  Under the Obama mortgage loan foregiveness rules, the amount of loan forgiveness depends upon your income.  The higher your income, the less you can receive in loan forgiveness.  This functions like a tax: if you work and receive income you lose the ability to receive loan forgiveness.  So, why work?  The same kind of disincentives are in place with food stamps, unemployment compensation and host of government programs to help the needy and the middle class.

The result:  people rationally choose to leave the labor force and live off of the various pecuniary benefits that one can receive if one is not working.  The point is that you lose these benefits if you choose to work for a living.  That is essentially the same as a tax.

Mulligan's argument is that, as folks drop out of the labor force (as more than 6 million Americans have done since Obama was sworn into office), the economy deteriorates because those 6 million and more are no longer producing anything.  That lost GDP is gone forever.  Transfer payments, Obama's favorite economic policy, reduce GDP.  The result is that we are all poorer.  In the end, the middle class suffers, because the middle class depends, for economic improvement, on a vibrant economy.

The policy of redistribution makes the whole society poorer than the society would be otherwise.  Of course, a weak economy, made weaker by Obama policies, has the most severe impact upon our lowest income citizens.  The result: policies designed to help poor people end up impoverishing poor people.

Yes, the middle class has lost ground in the last couple of generations.  But, not for the reasons you might think.  The steady rise of government and the steady rise of redistribution schemes has created disincentives for a growing number of Americans, who simply drop out.  These folks, an increasingly larger percentage of the population, become a burden to themselves and to the country.

Fast forward....Greece.

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