A compromise deal was struck in DC that would avoid significant tax increases but would extend even further unemployment benefits that we have no money to pay for.
It may make many feel good to extend benefits to the unemployed, but if the goal is to actually heal the economy and get people back to work, extending UI benefits will only hamper recovery and job growth.
First is the obvious incentive problem. It should go without saying, but it appears too many still don’t get it: when you pay people not to work, the result is more people not working. Those that are unemployed will be less likely to adjust their standard to the labor market by accepting lower pay or different responsibilities from those they had before. With the cushion of UI benefits, more people will try to hold out for a job similar to the one they had prior to the bust. Unfortunately, many of the bubble-era jobs are not coming back. Extending UI benefits will just delay this needed adjustment and prolong high levels of unemployment.
Secondly is the notion that mailing checks to the unemployed will give them more money to spend and will boost “aggregate demand” by stimulating consumer spending and get the economy moving again. But getting people back to work will also put money in their hands to spend. And I’ve addressed the aggregate demand/consumer spending fallacy before. Increased consumer spending is the result of, not the cause of, economic growth. Trying to “stimulate” the economy via more consumer spending addresses a symptom rather than the disease.
This Freeman article succinctly summarizes some salient points about why unemployment benefits do not stimulate the economy. Among the points included is the need for new production to create jobs:
As for stimulating economic activity, it is not the level of consumer spending but new directions in production that make the difference. Entrepreneurs conceiving of new ways to meet economic necessities or desires in the marketplace create new incomes with their positive ripple effects in the economy. Meeting such needs requires that entrepreneurs find the savings, or loanable funds, to acquire the resources to engage in production. Of course, followers of Keynes’s mistaken 1937 view—“The investment market can become congested through the shortage of cash. It can never become congested through the shortage of saving. This is the most fundamental of my conclusions within this field”—do not recognize the necessity of savings to fund investment expenditures. But the fact is that the government’s taxing the employed or borrowing the community’s savings to pay people who are unemployed does not help entrepreneurs in their socially useful task of new wealth creation.
And let’s not forget that states are so over committed that they are borrowing from the federal government by the billions to cover their UI obligations. North Carolina’s UI debt is up to $2.4 billion, a debt scheduled to begin requiring interest payments in 2011. To cover these debts, a UI tax increase on employers is likely to be the result – which of course will further stunt job creation.