Deck 9: The Great Stagflation

Question 1

Spending on the food stamp program doubled during the first Obama administration, reaching $82 billion per year. People who received additional aid under the program surely benefitted from it, but people who had to pay for the program just as surely were made worse off. On what basis would you decide how much we should spend on food stamps? Why don't we simply have food stamps for everyone?

Answer 1

Food stamps are vouchers given by the government to those who have a low income. These are exchangeable for food and were initially issued in booklets just like postage stamps. Presently, they are received in the form of electronic transfers to debit cards. During the recovery years after the recession, the amount of people on the food stamps soars to very high levels.
Spending on food stamps increased drastically in the post-recession years. The total spending on the food stamp program reached almost $82 million in US between 2009 and 2013. Analyzing this policy in a value-free way shows that the policy of providing food stamps is inefficient. It takes one dollar from a taxpayer's income and transfers it to a low income individual in the form of a food credit which would ultimately be worth less than its actual value of a dollar to the recipient. This policy also prolongs unemployment as the people would lose these benefits once they are employed. As a result, even though they get some benefits their incomes would be considerably less than what they would be if they were employed. This reduces the economic recovery due to slow economic growth.
However, from the normative prospective that takes into account value judgments, the food stamp program can be regarded as a moral responsibility of the financially stronger classes of the society towards the financially weaker ones. Providing food stamps to everyone would be an unviable option on the basis of economic strategy. Nevertheless, these programs are being carried out and have been getting bigger in the recent years as economic inefficiencies are traded-off to fulfill political motives or moral programs.

Question 2

Under President Clinton's added work requirements, many longterm welfare recipients got jobs. Moreover, there is evidence that the educational performance of the children of these parents improved substantially. Why do you suppose that President Obama decided to effectively dismantle the reforms that President Clinton had worked so hard to achieve?

Answer 2

Welfare reforms refer to the changes in the functioning of a particular welfare system. These reforms are mostly in favor of liberalism supporting free-market capitalization. Welfare reforms can be defined as the attempts made by the government to alter the social welfare policy of the country. The specific aim of these reforms is to decrease the number of families or individuals that depend on the assistance provided by the government and to aid in their struggle of becoming self-sufficient.
The welfare reforms brought in after the Great Depression to improve the economic condition of the people are considered to be counter-productive in the recent years. They put an added pressure on the government by increasing the dependency of the people for financial assistance. Many changes are brought about in the welfare reforms every time a new politician comes to power.
Many welfare recipients got jobs after a certain politician introduced added work requirements in order for the people to be eligible for receiving government's assistance. This change positively impacted the lives of the people who were dependent on this financial aid as they now became self-sufficient.
Becoming self-sufficient meant that they could now own houses, eat better food, provide better living conditions to their families and could afford to spend money on their children's education. There is evidence to support the claim that the educational performance and achievements of the children of these people were significantly enhanced.
However, since every new politician brings in a new policy in his/her term, these reforms too were dismantled. It is tricky to point out why the politicians do anything. The reason for these changes might be the differing policies and opinions of two politicians or it might be a political party's initiative to please their supporters.
The dismantling of welfare reforms might have been done to highlight the philosophy of equal outcomes for everyone. Since, the welfare reforms put an additional financial burden on the government, increasing these would negatively impact the economy. This is because the people receiving these aids would not be giving back anything to the government.

Question 3

In this question, consider only the eighteen months for which the latest recession lasted. Suppose that the liberalization of unemployment benefits tended to raise the unemployment rate because it reduced the incentive of the unemployed to return to work. How would you decide whether the liberalization of benefits was good or bad for the economy?

Answer 3

A policy should always be evaluated on the basis of its marginal costs and benefits. Its effectiveness should not based on a time frame or a time constraint. For instance, unemployment benefits tend to increase after the onset of a recession. This is done to aid the people who have lost their jobs across all the sectors of the economy. However, it puts an additional burden on the government that has to spend its revenues on something which wouldn't be productive for the economy.
Deciding whether the liberalization of benefits was a good or a bad move is tricky. This can be done by comparing its costs and benefits in the economy. While considering the instance of expanding unemployment benefits, a clear opportunity cost would be that those who have the ability to be productive members of the economy are now opting to not work. This negatively impacts the GDP. It also causes the unemployment rate in the economy to rise even further. Another added cost of this expansion is that there is an added burden of taxes on the other workers or that the government has to increase its debt to fund these unemployment benefits.
However, the transfer of income from the employed to the unemployed in itself can't be considered a direct economic cost. But the decisions made by the working citizens are greatly influenced by the taxes and government debt. An increased tax burden on the workers may lead to a reduction in their efforts and productivity.
The advantages of unemployment benefits can be expressed by the reduction in criminal activities, lesser bankruptcies as well as provision of financial support for the unemployed people. They also maintain the demand for goods and commodities in the market which would be severely hit if the people wouldn't have any money or resources to spend in the market. Since the people who receive these benefits are more than likely to spend them all, they would be putting the money back into the economy, consequently facilitating the growth and recovery of the economy.

Question 4

Now look at the four years after the recession and again answer the query posed in question 3. Is the impact on the unemployment rate ,the only factor to consider'? (If you think other factors should be con-sidered make sure that you take into account both the disadvantages and the advantages of liberalized benefits.)

Question 5

If higher federal Spending reduces the unemployment rate, why don't we increase federal spending until the unemployment rate is 3 or 4 percent?

Question 6

As a practical matter when Congress created the Environmental Protection Agency (EPA),it required the agency to ignore economic costs when deciding what regulations to issue. Analyse how this requirement changes the likelihood that the EPA issues regulations that make life better for Americans.