A season and a half to midterms, Republicans are already working hard on softening their message. Unemployment is still not low enough, they say. So perhaps there is a federal program or two the GOP might support after all. And, should a downturn come, more programs will certainly be warranted.
The Republicans are correct about the joblessness — but not about how to mitigate it. Compassionate conservatism, the 2014 version, hardly represents the answer. The truth is that government programs, financial or social, were what impeded the recent recovery. The best thing for policy leaders to do is to acknowledge old truths about economics, and explain the consequences of recent policy.
Big Truth No. 1: In 2008, the government and the Federal Reserve rescued too many banks, and too arbitrarily. Too Big to Fail can’t be a perpetual doctrine.
Big Truth No. 2: Programs that aim to help the poor reduce overall work, including, eventually, work opportunities for the poor. Many people understand the theory behind this argument, but lack data. Especially precise data.
This is why the jury for the Manhattan Institute’s Hayek Prize this week awards the prize to The Redistribution Recession by Casey Mulligan of the University of Chicago.
Mulligan, a kind of anti-Piketty, delivers facts and numbers. He shows which programs expanded or maintained during and after the financial crisis made unemployment higher. Food stamps, for example, were made available to more people, decreasing their interest in finding employment that might disqualify them. Legislated changes in the unemployment-insurance programs extended the period in which Americans could receive such benefits. COBRA, the program ensuring laid-off workers access to their jobs’ health insurance for a time, was sustained as well.
Mulligan’s very data-based conclusion: “At least half, and probably more, of the drop in aggregate [work] hours would not have occurred, or at worst would have been shortlived.”
What about today, and the future, for example, under the Affordable Care Act? The health-care act, Mulligan finds, raises the effective marginal tax rate five percentage points for nonelderly families. That means those families will, practically speaking, receive five cents less than they would have prior to the act on the last dollar they earn.
Or, to put it another way: The law incents people to work less. Six to 11 million Americans can make more money by earning less because of the perversities of the Affordable Care Act.
Mulligan’s book came out in 2012, but only looks better as the months pass.
Data beget data. After Mulligan, a 2014 Congressional Budget Office study basically affirmed his argument, allowing that the Affordable Care Act would “reduce aggregate labor compensation in the economy by about 1 percent” relative to pay without any law. The CBO also allowed that “labor use,” i.e., work, would drop.
The reason Mulligan matters especially now, though, is the cultural attraction to political mush. Hayek himself, in whose honor this prize is given, understood better than anyone else the tantalizing draw that spending represents for politicians of all parties. In a year troublingly like the current one, 1977, he said:
There is a current view which is not completely wrong — that is what makes it so dangerous — that all you have to do is increase expenditures and that of course leads to use of inflation to secure full employment. But this is only a short-term relief which in the long term makes things worse.
Hayek’s reference point was the United Kingdom after World War I. What Mulligan’s book shows is that we are much closer to that U.K. now then we were even in the bad old 1970s.
An alternative, as Hayek noted, indeed in an interview with NR’s William F. Buckley, is allowing markets to drop when they are so inclined, and allowing unemployment to rise as well. Recession without stimulus is a bitter option, but can also be shorter-lived than medicated recessions like the recent one. Reemployment that follows unmanaged downturns is stronger than what we have seen lately.
Mulligan’s book, and for that matter all of Hayek’s, ought to go on every coffee table this summer. Even those obsessed with the election cycle may want to pick them up. Such books remind us: A squishy policy that wins in the autumn of 2014 may be the same policy that loses an election come 2016.
— Amity Shlaes chairs the jury of the Hayek Prize and the board of the Calvin Coolidge Presidential Foundation.