NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Means-Tested Subsidies and Economic Performance Since 2007

Casey B. Mulligan

NBER Working Paper No. 17445
Issued in September 2011
NBER Program(s):   EFG   PE

The aggregate neoclassical growth model – with means-tested subsidies whose replacement rates began rising at the end of 2007 as its only impulse – produces time series for aggregate labor usage, consumption, investment, and real GDP that closely resemble actual U.S. time series. Despite having no explicit financial market, the model has investment fall steeply during the recession not because of any distortions with the supply of capital, but merely because labor is falling and labor is complementary with capital in the production function. Through the lens of the model, the fact that real consumption fell significantly below trend during 2008 suggests that labor usage per capita is expected to remain well below pre-recession levels for several years.

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