Richard Vedder wrote the article below, which appeared in Wall Street Journal last Wednesday. Although it doesn’t directly affect mortgage buyers, or the ownership of real property notes it offers an interesting commentary on government handouts. Reprinted with permission.
The American economy grew by 3.5% per year from the mid-17th century through the late 20th. Since then, this growth rate has declined dramatically. The 2012 final figures will show that the annual rate for real output growth in the first ten years of the century was about 1.81%.
Why is there a slowdown? The key part of the explanation is that Americans aren’t working as hard today. This trend is more than just the recession and slow economy over the past few years.
According to the national income accounts, about 70% of U.S. production can be attributed to human labor. However, the percentage of Americans working age has declined.
In recent decades there was a steady rise in the employment-to-population ratio: For every 100 working-age Americans, there were eight more workers in 2000 than in 1960. This is due to a higher percentage of women in the workforce. However, the majority of the increase in working-age population since 2000 has been erased.
You may not realize how important the decline is. The U.S. would have nearly 14 million more workers if it had the same number of people of working age today as in 2000. Even assuming these workers are 25% less productive than the current labor force, the U.S. gross domestic products would still be over 5% higher ($800billion, or approximately $2,600 per person). The GDP growth rate would increase by 2.2% annually, and not 1.81%. In short, the retreat from work has had a significant impact.
Why is America working less? There are many factors that can explain this phenomenon, but the main reason is a range of public policies that have decreased the incentive to work. These policies include:
* Food stamps. People work to eat. The government providing food reduces the need to work. The food-stamp program has seen a significant increase in popularity since its inception in 1960s. But it is especially strong in the 21st century. Today, more than 30 million Americans are receiving food stamps than 2000.
According to the Department of Agriculture, the sharp increase in food stamp beneficiaries dates back to 2008’s financial crisis. Between 2000 and 2007, the number of beneficiaries grew from 17.1 million up to 26.3 millions. This number has risen to 47.5 millions in October 2012. In 2009, the average monthly benefit for a person increased from $102 to $125 per lună.
We would expect that the number of people who are on food stamps will increase due to rising unemployment, poverty, and falling incomes in 2008, possibly even 2009, and perhaps 2010 (even though recession was officially over in 2009). There is more going on.
Compare October 2012 with 2010, the last month in which data on food stamps were available. The unemployment rate dropped to 7.8%, from 9.6%. Real GDP was growing steadily, if not aggressively. The use of food stamps should have peaked, and may even be beginning to decline. The number of recipients grew by 7,223,000. The number of food stamp recipients increased by nearly 10,000 per day during a period of declining unemployment and increasing output. Congress should investigate why.
* Social Security Disability Payments. Americans are healthier, and the decrease in dangerous mining and industrial production jobs should have resulted in a lower number of Americans being unable to work due to disability. But the reverse is true.
In 1990, only three million Americans were eligible for work-related disability benefits from Social Security. This number had not changed much in the ten years prior. The number of people who have been granted disability checks has increased dramatically since then. It has reached 6.5 million in 2005, five million in 2000, and nearly 8.6 millions today. David Autor, MIT, has demonstrated that the disability program is ineffective and inefficient. It also grows at an inexorable rate. News media also reported on cases of fraud rampant.
* Pell grants. The traditional argument for paying people to go to college over working is that higher education creates “human capital”, which is crucial for the country’s future economic growth. A study Jonathan Robe, Christopher Denhart and I conducted for the Center for College Affordability and Productivity (that is soon to be published) found that almost half of four-year college graduates work in jobs that do not require a college education. The college-educated include over 1 million “retail sales people” and 115,000 “janitors, cleaners”.
Pell Grants were awarded to college-bound young people in 2000. This number increased by one-third to 5.2million in 2005 and a million more in 2008. The number rose by more than 50% to 9.7 million in the following three years. This is almost six million more than it was a decade ago. This means that there are fewer people working. The mismatch between college graduates and jobs that require college education continues to grow.
* Additional unemployment benefits. Since the 1930s, the unemployment-insurance system has been designed to lend a short-term, temporary helping hand to folks losing their jobs, allowing them some breathing room to look for new positions. The traditional 26-week benefit is still available to many people who are out of work for more than a year.
The economy isn’t growing as much, it’s true. However, if you pay people to stay home, they will be more inclined to accept lower pay jobs or seek work elsewhere.
This game is not just for the government programs. For example, a more worker-oriented immigration policy in recent decades would have measurably raised the rate of economic growth and increased the employment-to-population ratio. The story also includes taxes: Higher marginal tax rates today on income derived from work could lead to further reductions of work effort and slower economic growth.
The majority of Americans understand the necessity to cut government spending in order to reduce the national debt. There is an additional reason to reduce government spending on specific programs. If people are less motivated to work, they may seek employment and stimulate economic growth.