Down the drain: How the feds flushed $833 billion in stimulus
Mulligan’s work starts with a simple insight: Not all of the spending authorized by ARRA was stimulus, at least not as economists usually define it. Some of the program’s $833 billion went toward visible public works projects like paving runways and building toilets. But about a third of it went toward what economists call “transfer spending,” which includes aid programs for the unemployed and other low-income individuals. Among other things, the stimulus extended an existing program to provide federal unemployment benefits to those who had exhausted state benefit programs. It added a temporary bonus of $25 per week to federal unemployment benefits, suspended taxation on the first $2,400 of unemployment benefits in a given year, allocated $87 billion to increase the federal share of Medicaid benefits, and provided another $25 billion to subsidize health coverage for the newly unemployed.
Such programs provided an economic cushion to millions of out-of-work people at the height of the recession. They also made it less painful to be unemployed—which is to say, they made it less costly. “When you make something less painful,” says Mulligan, “people are going to do less to avoid it.”
What Mulligan found is that the 2009 stimulus created big incentives for people to not work. He estimates that between 2 million and 3 million people “had as much disposable income while unemployed as they would have by accepting a job that paid 80 to 100 percent” of what they were making in their previous job. Before the stimulus passed, that would have been true of fewer than 1 million people.
It’s clear that the incentives changed. But did people respond by behaving differently? Mulligan thinks at least some did. “The effect of incentives on unemployment is something we” —we being economists—“have studied for a long time,” he says. “And the effect is clear. When people are paid more for not working, they work less.” Even, he says, during a recession.