The Redistributive Recession: How Labor Market Distortions Contracted the Economy.

• Author: Burkhauser, Richard V.
• Position: Book review

* The Redistributive Recession: How Labor Market Distortions Contracted the Economy

By Casey B. Mulligan

New York: Oxford University Press, 2012.

Pp. xii, 351. $39.95 hardcover.

The Great Recession officially began in the fourth quarter of 2007 and ended in the third quarter of 2009. But more than three years later, despite massive federal stimulus spending focused on offsetting the decline in American workers' labor earnings, employment rates are still substantially below pre-recession levels, as is the income of the average American. While unrepentant Keynesians such as Paul Krugman (End This Depression Now! [New York: Norton, 2012]) are writing polemics that continue to argue that our slow recovery is the result of stimulus spending that is insufficient to jump-start aggregate demand, Casey B. Mulligan, a professor of economics at the University of Chicago, argues the reverse in this tightly reasoned new book based primarily on his empirical research. He posits that government policies in 2008 and 2009, rather than mitigating the consequences of a recession triggered by the bursting of the housing-market bubble, turned it into the Great Recession.

In chapter 1, Mulligan poses two provocative questions: Would the U.S. recession have been deeper if the federal government had not intervened in financial markets and had not enhanced its safety nets for the unemployed and the poor? Or were the labor market declines amplified and prolonged by federal government actions? To answer these questions, Mulligan argues that it is necessary to identify empirically the factors that account for the 7 percent decline in employment and the 10 percent decline in hours worked for Americans between 2007 and 2009.

To do so in the context of microeconomic principals of macroeconomics, he first looks at the "fundamentals" that equilibrate supply and demand in the aggregate labor market--worker productivity, people's willingness to work, labor income taxes, and labor market regulations--to account for this decline in employment before turning to the usual suspects outside this market according to Keynesian analysis--drops in investment, financial deleveraging, a "liquidity trap," and consumer confidence. What Mulligan finds is a cautionary tale of the unintended consequences of government policy gone wrong.

In chapter 2, he develops and uses his labor market model with aggregate time-series data on consumer spending, labor usage, productivity, and real wages. He...