recovery act

Economix: Casey B. Mulligan: Testing for Need

Casey B. Mulligan is an economics professor at the University of Chicago.

One myth about the surge in federal government spending over the last four years is that it was an automatic response to the recession. But the “tests” that beneficiaries of various government safety-net programs are required to pass before they can participate have gotten easier since 2007.

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The government safety net is intended to help people in need. Because a lot of people don’t need the government’s help, a variety of tests have been designed to distinguish the needy from everybody else. These include employment tests, asset tests, income tests, earnings tests, retirement tests and age tests.

Two of the largest government programs are Social Security and Medicare. They administer essentially one test, for age. Once a person reaches age 65 (sometimes earlier), he or she can receive benefits from these programs regardless of income, assets or employment status.

In the past, and still today in most of Europe, Social Security required beneficiaries not only to be elderly but to be retired – the retirement test.

These days unemployment insurance is another major government expenditure, and its beneficiaries have to pass an employment test. That is, they have to be without a job and actively looking for one in order to receive benefits (a few states have small programs for employed but underemployed workers). Once a person passes the employment test, his or her assets or financial income are irrelevant for determining eligibility or benefits.

Beginning in the 1990s, cash family assistance or “welfare” programs began to have their own employment tests, but with the opposite determination: employment was required for participation. The 2009 American Reinvestment and Recovery Act permitted states to relax some of these requirements.

Family assistance programs traditionally had asset and income tests: a family could qualify only if both its income and assets were low enough. Medicaid – a government-financed health-insurance program for the poor – also has asset and income tests. The Patient Protection and Affordable Care Act of 2010 relaxed some income tests effective 2014, although even then a family with too much income will not qualify for Medicaid.

Traditionally the food stamp program (now called the Supplemental Nutrition Assistance Program, or SNAP, and participants now receive debit cards from the Department of Agriculture, rather than “stamps”) overlapped closely with family assistance programs, with some of the same asset and income tests. The 2002 farm bill provided an opportunity to avoid some of the SNAP tests, and states have recently taken that opportunity.

The bill allowed states to confer automatic SNAP eligibility on all households receiving a specified social service informational brochure, hard as that may be to believe. Households that participate in SNAP under this “broad-based categorical eligibility” rule still have benefits determined by the same formula (of household size and net income) as the other SNAP beneficiaries.

A practical result of broad-based categorical eligibility is that households can receive benefits based solely on their net income – it typically must be less than 130 percent of federal poverty guidelines (about $20,000 a year for a family of four) – and not based on the value of their assets or their employment status.

Even SNAP households not taking part through broad-based categorical eligibility saw the asset test relaxed by the 2008 farm bill, as the values of vehicles, retirement accounts and education savings accounts began to be excluded from the test.

So, simply put, in most states having assets is no longer a barrier to receiving food stamps. That’s the main reason that participation in the program increased 37 percent more than the number of families with income near or below the poverty line.

I agree that safety net programs would have grown from the recession alone, but, for better or for worse, they have grown many times beyond that thanks to numerous changes in program rules.

Article source: http://feeds.nytimes.com/click.phdo?i=7f3ce117238b311f73050cd25d0c3769

Economix: After the Fall(s)

The gross domestic product number for the first quarter was disappointing, and came in well below what economists had forecast when the year began. Analysts say that things will probably pick up later in the year, but then, we have heard that before.

Remember the White House’s initial projections about unemployment after the Recovery Act was passed? The prediction was that unemployment would never reach 8 percent. Instead, we haven’t seen unemployment below 8 percent in over two years. Then there was “Recovery Summer,” which actually saw growth slow substantially, followed by subsequent predictions of an imminent acceleration.

Hindsight is 20/20, of course, but in retrospect the projections for an easy, and possibly even “V-shaped,” recovery seem almost comically optimistic. Especially when you look at the history of financial crises and the “lost decades” they can sow.

In a paper presented at the January 2009 meetings of the American Economic Association, Carmen Reinhart and Kenneth Rogoff documented the ugly aftermath of previous financial crises. Looking at over a dozen financial crises in developed and developing countries going back to the Great Depression, for example, they found that the unemployment rate rose an average of 7 percentage points over 4.8 years.

Source: Carmen M. Reinhart and Kenneth S. Rogoff, “The Aftermath of Financial Crises.” Notes from the paper: “Each banking crisis episode is identified by country and the beginning year of the crisis. Only major (systemic) banking crises episodes are included, subject to data limitations. The historical average reported does not include ongoing crises episodes.”

This line of research has been fleshed out in other collaborations, including their book “This Time Is Different: Eight Centuries of Financial Folly,” which Economix readers will recognize as a constant and invaluable reference for this blog.

More recently, Professor Reinhart and her husband Vincent (also an economist) have chronicled the “lost decades” that frequently follow financial crises — i.e., that the damage wrought by a financial crisis can last much longer than “only” a few years, which just a couple of years ago had seemed far too pessimistic. In the abstract they write:

While evidence of lost decades, as in the depression of the 1930s, 1980s Latin America and 1990s Japan are not ubiquitous, G.D.P. growth and housing prices are significantly lower and unemployment higher in the 10-year window following the crisis when compared to the decade that preceded it. Inflation is lower after 1929 and in the post-financial crisis decade episodes but notoriously higher after the oil shock. We present evidence that the decade of relative prosperity prior to the fall was importantly fueled by an expansion in credit and rising leverage that spans about 10 years; it is followed by a lengthy period of retrenchment that most often only begins after the crisis and lasts almost as long as the credit surge.

Hopefully things will pick up later in the year, as economists say. After all, many of the reasons for the slow growth last quarter were, in Ben S. Bernanke’s words, “transitory” (snowstorms, for example, are unlikely to persist through the summer months).

But given the record of other post-crisis recoveries, unfettered optimism — especially when other unknown obstacles, however “transitory,” could knock us off course once again — seems imprudent.

Article source: http://feeds.nytimes.com/click.phdo?i=482b7dc260f2362ddfbd804835232eae

Economix: Casey B. Mulligan: Testing for Need

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Economix: After the Fall(s)

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