Why have the middle class become net receivers of welfare during this recession?
Matthew Martin 7/18/2012 03:25:00 PM
Greg Mankiw here sends us to some very interesting CBO figures here. A particularly interesting factoid that Mankiw highlights is that for the first time in the sample period, the middle income quintile (that is, people at the middle of the income distribution) is on net receiving more money in government benefits than they pay in taxes--on average people between the 40th and 60th income percentiles receive a net $0.05 (that is, benefits minus federal taxes paid) for every $1 they earn in market income. Or as Mankiw put it
He notes that "part of this change" is due to the recent recession, but tries to imply that the government largess has been especially large this time around, since we did not see the same thing happen for the 1982 recession. So here is the answer to our question.
Figure 1. Mankiw discusses the economy."...the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess."
This recession was just worse than the one in 1982:
|Figure 2. Indexes of real GDP following the pre-recession peaks|
of the 1982 recession (red) and the current recession (blue)
Long-term unemployment is much higher than in 1982One of my favorite economic metrics lately has been to compare the number of newly unemployed people, those who lost jobs in the last five weeks, with the number of long term unemployed, defined as those who have been out of work for more than 27 weeks:
|Figure 3. Newly unemployed (blue) and long-term unemployed (red).|
Now just why is long term unemployment up compared to 1982? I do not have a theory at the moment. It would be tempting to blame Obama's extensions of unemployment benefits, but research has shown that this is not so: extending benefits could only account for at most an increase of 0.8% in the unemployment rate (thats about 1,200 thousand people, for comparison to Figure 3), not nearly enough to allow that rise in the long-term unemployed.