What Does It Cost to Buy a Recession?

By Oct 2009, U.S. labor usage was more than 10 percent below trend. Even if it returned to trend by the end of 2010, that would put labor usage about 20 year x percentage points below trend (i.e., an average 6-7 percentage points below trend for each of three years). A year’s labor income is about $10 trillion, so that’s $2 trillion that labor income has been reduced over the three years.

How to Purchase a Recession

Suppose for the moment you had a lot of $ to bribe people not to work, or employers not to hire. What method of allocating the bribes would reduce employment the most? How much would it cost you to purchase a recession like this one?

If you simply paid people not to work, shrinking the labor usage by that much might cost about $3 trillion.

It can be a $3 trillion task because people who would not work anyway may take you up on your offer not to work. If you could target your bribes, you would want to target them to the weakest employment relationships — those for which supply is closest to demand. With very well chosen targets, you could make a recession like this for a mere $100 billion.

But do not expect that you could target so well in practice, because it’s difficult to know which employment relationships are the weakest, and once you started paying people for what appeared to you to be weak employment relationships, others might put on the appearance. But at least you could try to target the types of people who are generally expected to be working soon, such as persons searching for jobs (interestingly, that’s what unemployment insurance does).

All together, you would be hard pressed to make a recession like this for less than $1 trillion.

UI is an Illustration, but not the Major Force

Unemployment insurance (UI) reduces the employment rate, by increasing the pay someone can earn while not being employment, and reducing the after-tax pay earned while employed. But I raised the question above to demonstrate that UI cannot be the only, or even a major, reason why employment is so low.

Recall that UI benefits are voluntary: nobody forces you to take them. Thus, even if UI had the purpose of reducing employment (which it is not), it could not be much more effective per dollar of expenditure than the hypothetical “recession purchase” discussed above.

UI will spend something like $300 billion for 2008-10, and obviously that $300 billion is for the PURPOSE of minimizing employment. To make this recession by itself, UI would probably have had to spend more than $1 trillion. (this is the same argument I made in “Public Policies as Specification Errors” for why UI was not a major factor in the Great Depression, either).

Mortgage modification is almost a big enough operation by itself to make this kind of dent in the labor market (whether it actually does is another question). For example, if the Obama Administration achieved its goal of modifying 9,000,000 mortgages and each mortgage were written down an average of $75,000, that would be a total of $675 billion.

If you took the combination of mortgage modification, UI, big parts of the “stimulus” law, and other anti-employment policies, we probably are looking at over $1 trillion worth of spending that encourages people to have lower labor incomes.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

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