September 1 2010

I'm Sorry. What?

Hadley Heath

Please tell me I'm not the only person who read this and thought, "I'm sorry. What?"  There is something really fishy about this logic.  Ruth Marcus writes for the Wilmington News Journal:


Economist Keith Hennessey, an adviser to President George W. Bush, looked at the issue from a different perspective. He assumed that the longer period for collecting benefits would result in increased unemployment - contributing somewhere between 0.5 and 1 percentage points to the unemployment rate - and considered whether the trade-off was worthwhile.

At the lower effect, with unemployment at 9.5 percent, he calculated that "eight people who would like a job but cannot find one are getting more generous (unemployment) benefits for each person who is getting those same benefits and choosing not to take a new job."

At an 8-to-1 ratio, extending unemployment is good policy, Hennessey said. And what if the more generous benefits contribute a full percentage point to the unemployment rate? Then the ratio of out-of-luck worker to loafer drops to 3.5-to-1. "That is a tougher call, but I would still say yes," Hennessey concluded.


Okay, so either one out of every nine unemployed people will remain unemployed because of the disincentive to work in the extension of jobless benefits. Or two out of every nine unemployed people will remain unemployed for this reason.

It seems that Marcus (and Hennessey) are ignoring how high unemployment affects the economy - not just the individuals who are unemployed.  Consider those numbers again: if one or maybe even two out of every nine jobless people are voluntarily unemployed - they aren't trying that hard to get work because they can rely on the unemployment benefits - that adds up to millions of people.  There are currently about 14.6 million unemployed people in the United States.  So, are you telling me that a policy that essentially encourages approximately 1.62 to 3.24 million people to remain jobless is good for the United States?  That's billions in lost productivity and a smaller economic pie, in addition to the money spent paying unnecessary benefits.

 
Putting that part of the work force back into jobs is tantamount to taking our current unemployment rate of 9.5% and lowering it to 8.4% or 7.4%.  That's pretty significant.


Of course we don't want people who are looking for work in earnest, and simply can't find a job, to suffer, but we need to also understand the full consequences of policies that discourage work.  It's more than a budget problem.  It's a big economic problem.

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