Stuff Casey Mulligan Doesn't Like: Social Insurance

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Written by Shawn Fremstad   
Wednesday, 23 November 2011 13:30

In a recent report, Arloc Sherman of the Center on Budget and Policy Priorities concluded that the current income poverty rate would be much higher if not for social insurance, including temporary expansions of social insurance included in the 2009 Recovery Act. For example, Sherman concludes that about 6.9 million more Americans would have fallen below the income poverty line if not for six initiatives in the Recovery Act (specifically, three tax credit provisions, two unemployment insurance expansions, and an expansion of Supplemental Nutritional Assistance).

Both Sherman and I think this helps show that social insurance is doing one of the things it is designed to do: insuring working- and middle-class families against steep income declines during a recession. In an Economix post today, Casey Mulligan offers a less charitable interpretation:

... the safety net has taken away incentives and serves as a penalty for earning incomes above the poverty line. For every seven persons who let their market income fall below the poverty line, only one of them will have to bear the consequence of a poverty living standard. The other six will have a living standard above poverty.

Note the criminological rhetoric deployed by Mulligan: Social insurance effectively pardons six out of every seven evildoers who apparently connived and conspired to get laid off, have their hours or benefits reduced, or not get hired during the Great Recession knowing full well that they could likely do so without having to "bear the consequence of a poverty living standard." And, to add injury to this insult, social insurance "penalizes" people who aren't currently receiving it.

My first reaction is befuddlement. Does Mulligan think that private insurance penalizes people who don't submit claims? Am I penalized when my neighbor's home is burgled and his insurance company partially compensates him for his losses?   

But for the sake of argument, let's suppose that Mulligan is right—that social benefits generally (or the six provisions in the Recovery Act specifically) punish workers and reward non-workers. Unless one believes that all of the non-workers are somehow solely to blame for their unemployment during the worst downturn since the Great Depression, the solution to this problem isn't to eliminate the benefits, but rather to ensure that they are designed properly. This can be done, for example, by not restrictively means-testing benefits in ways that can reduce overall income for workers either when they move from unemployment to employment, or from poorly compensated work to less poorly compensated work.

In fact, this is something that progressive lawmakers already understand quite well. All of the specific social insurance programs that were temporarily expanded in the Recovery Act--the ones that Sherman concludes helped nearly 7 million Americans avoid poverty in 2010--are designed with this in mind. Both the EITC and Make Work Pay Tax Credit are structured in ways that increase incentives to work rather than reduces them. As for unemployment insurance, given that it only replaces about 45 percent of lost wages (and, on top of that, is time-limited), it's hard to view the program as a reward for not working. Finally, while the Supplemental Nutritional Program is more restrictively means-tested than these other social insurance benefits, it is still designed in a way that makes it more "rewarding" to take a poorly compensated job than to remain unemployed.

It's also worth noting that nearly 40 percent of the Americans who are prevented from having to "bear the consequence of a poverty living standard" are children. Personally, if Mulligan is correct and these children need to be punished, I'd rather have Mulligan give them all a quick spanking instead of forcing them to live below the poverty line.

Finally, Mulligan's critque, offbase as it is, does point to one of the problems with using an income poverty line to guage the effectiveness of our system of social insurance. The income poverty threshold is simply a very low point in the income distribution. Economic hardships do not magically drop off once that point is attained.  Instead, the incidence of hardships like food insecurity follows a steady income gradiant.

Thus, looking at how various social insurance benefits affect the income poverty rate mostly tells us about the extent to which those benefits lifted people who were already near that very low point in the distribution to another point in the distribution that is just above it. But social insurance programs are designed with broader purposes in mind, including bolstering economic security and reducing various material hardships for working- and middle-class people more generally. The benefit expansions in the Recovery Act, for example, helped many more working- and middle-class people (several times more people, in fact) than the 7 million of them that it lifted above the income poverty line.

Tags: inequality | jobs | poverty | social insurance | unemployment