Wednesday, August 24, 2011

The Evidence Is In That Government Transfer Benefits Reduce GDP And Employment

From The Wall Street Journal, "Keynesian Economics vs. Regular Economics: Food stamps and other transfers aren't necessarily bad ideas, but there's no evidence they spur growth" by Robert J Barro:
The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.
This result does not mean that food stamps and other transfers are necessarily bad ideas in the world of regular economics. But there is an acknowledged trade-off: Greater provision of social insurance and redistribution of income reduces the overall GDP pie.
To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.

Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. [Emphasis added.]
Read the complete opinion piece here.

Robert Barro is an economics professor at Harvard and a senior fellow at Stanford's Hoover Institution.

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