Unemployment Benefits Aren't Stimulus

Discussion in 'Economics' started by SomeYoungGuy, Jul 8, 2010.

  1. http://online.wsj.com/article/SB10001424052748704862404575351301788376276.html


    The current debate over extending and increasing federal unemployment benefits encapsulates the disagreement between the Democrats in power in Washington and their Republican opponents. What the consequences will be of raising unemployment benefits in today's depressed economy is at issue.

    The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view.

    The Democratic retort is that the economy today is so different from the past that we have to suspend our traditional understanding of economics. With five job seekers for every job opening, the unemployed are desperate for work and increasing unemployment benefits will have very little if any disincentive effect. This view hinges on a total change in employee behavior from "normal" times to the current period of "the Great Recession."

    On the face of it, the idea that higher unemployment benefits won't lead to more unemployment doesn't make much sense. Imagine what the unemployment rate would look like if unemployment benefits were universally $150,000 per year. My guess is we'd have a heck of a lot more unemployment. Common sense and personal experience indicate higher unemployment benefits will make unemployment less unattractive and thereby increase unemployment even in the Great Recession. As the chart nearby clearly shows, since the 1970s there's been a close correlation between increased unemployment benefits and an increase in the unemployment rate. Those who argue that things are different today don't have the data to back up their claims.

    The Democratic argument also ignores the impact of unemployment benefits on employer costs. Employers don't usually hire people to assuage their consciences. They hire people to make after-tax profits. And if workers require more pay because of higher unemployment benefits, employers will hire fewer employees. Whether increased unemployment benefits incentivize workers to work less or disincentivize employers from hiring more workers, the effect will be the same—higher unemployment.

    The second point made by the Obama administration is that unemployment benefits are a great way to stimulate demand. Increased unemployment benefits operate quickly and the recipients spend what they get, which makes these stimulus funds the best bang for the buck.

    Here again the facts are in dispute. Studies have shown that previous stimulus spending—much of which was also targeted for the poor and unemployed—was to a large extent saved and not spent. But I'm not going to rest my case on the obvious failure of Washington's prior stimulus packages. Based upon the above logic (as described in the January 2009 white paper co-authored by White House economists Christina Romer and Jared Bernstein) the administration forecast that the unemployment rate would be a little above 7.3% in the third quarter of this year. That isn't going to happen.

    View Full Image
    Associated Press

    The flaw in their logic is that when it comes to higher unemployment benefits or any other stimulus spending, the resources given to the unemployed have to be taken from someone else. There isn't a "tooth fairy," or as my former colleague Milton Friedman repeated time and again, "there ain't no such thing as a free lunch." The government doesn't create resources. It redistributes them. For everyone who is given something there is someone who has that something taken away.

    While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.

    To see this, imagine an economy that produces 100 apples. If 10 of those apples are given to the unemployed, then people who otherwise would have had those 10 apples now won't. The stimulus of 10 apples for the unemployed is exactly offset by the destimulus of 10 apples for those people from whom the 10 apples were taken.

    Given the massive inefficiencies the government creates in securing resources from the private sector, there may also be a large negative income effect over wide ranges of stimulus spending. This is the proverbial "toll for the troll." These massive inefficiencies could lead to lower output.

    To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may "buy" more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will "buy" less. There is no stimulus for the economy.

    But it doesn't stop there. While the income effects sum to zero, the substitution effects aggregate. The person from whom the unemployment funds are taken will find work less rewarding and will work less. The person who is given the unemployment benefits will also find work relatively less rewarding and will therefore work less. Both people in this two-person economy will be incentivized to work less. There will be less work and more unemployment.

    Not only will increased unemployment benefits not stimulate the economy, they will at the same time lower the incentives for people to work by reducing the amount people are paid for working and increasing the amount people are paid for not working. It's pretty basic economics.

    No one opposes unemployment benefits as a transition aid for people to get back on their feet and find a new job. Unemployment benefits are a safeguard for individuals down on their luck. But to argue that unemployment benefits actually reduce unemployment is disingenuous at best, and could induce our government to enact policies that have the effect of destroying our nation's production base from whence all benefits ultimately flow.


    * Obama Shifts to Export-Led Jobs Push
    * Long Recession Ignites Debate on Jobless Benefits

    Any government program that would reduce unemployment has to make working more attractive for both employer and employee. Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.

    My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?
  2. tax cuts lead to speculation and hyperinflation:(
  3. I understand the rhetoric against unemployment benefits and I do not exactly disagree. But do any of you realize that unemployment insurance keeps the population docile?

    The jobs are not there and they will not appear just because there are more out there active in the workforce. What would happen are desperate measures. Use your imagination.
  4. The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment.

    In an economy where there is NOT full employment, I cannot see how Unemployment Benefits increase the unemployment rate.

    There are > 5 people for every open position. In fact, at one point, the number of open jobs at one time had fallen something like 65-70% from its high of a few years ago.

    Even if some people stay out longer, this should have little effect on the unemployment rate. Now perhaps, the employer will talk to 12 people instead of 14 if some are getting the $$$ rather than looknig. But new jobs or more employment will not spring up because more people have to get work since they have no benefits...
  5. TGregg


    Really? So if there are so many jobs that only one loser doesn't have one, then we hand out 80 year unemployment benefits with a max per year of $2 million, you think everyone will still be employed?
  6. George W Bush gave massive tax cuts. I didn't notice any inflation. Were you born yesterday?
  7. An old friend of mine is talking about suicide. He lost his job of 20 years early last year. His unemployment extension was halted. The guy is fearful of homelessness and have too much ego to turn to his more successful siblings for help. He is in his 50's.
  8. pspr


    To extend unemployment benefits something else needs to be cut. This spend spend spend, give away give away give away has to stop. The U.S. is broke and so am I.
  9. A lot of unemployed aren't even looking for jobs BECAUSE of the unemployment benefits. "free" money for them while they search for that 100k+ salary job that they feel entitled to. Instead of being lazy cunts they should go out, swallow their pride and get a job that will at least bring in some income. Plenty of jobs out there, its america. Problem isn't the job market, the problem is the people. People thing because they have a college degree from super duper university that they somehow are supposed to have a job that pays 200k and allows them to sit in a chair and just sign their name on paperwork.

    I think they should cut off unemployment benefits after a certain amount of time, force people to go out and find some kind of job.
  10. maybe bacause you're blind?

    not to mention housing bubble but also medical services, tution, food, gas
    virtually everything except Chinese crap
    #10     Jul 8, 2010