Means-Tested Subsidies and Economic Dynamics Since 2007

Casey B. Mulligan

in The Redistribution Recession

Published in print November 2012 | ISBN: 9780199942213
Published online January 2013 | e-ISBN: 9780199980772 | DOI:
Means-Tested Subsidies and Economic Dynamics Since 2007

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This chapter estimates impacts of the expanding social safety net on the major macroeconomic variables—including GDP, consumption, investment, and labor hours—in a dynamic economic model with capital accumulation. Much of the aggregate changes in the labor market since 2007 can be interpreted as the result of changes in marginal tax rates or an impulse with similar characteristics. Moreover, the marginal tax rate changes coming from safety net expansions were enough to generate changes in the major macro aggregates that resemble the actual changes in direction, amount, and timing. The neoclassical growth model also offers an unconventional causal interpretation of the sharp drops in consumption, investment, and capital market values during 2008: the drops were, largely, a reaction to, and anticipation of, labor market contractions created by the expanding social safety net. In this view, it is incorrect to attribute the labor market contraction to drops in investment and consumer spending.

Keywords: neoclassical growth model; labor market; labor supply; means-tested subsidies; 2008–9 recession

Chapter.  13007 words.  Illustrated.

Subjects: Public Economics

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