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The Upside-Down Economics of Subsidized Unemployment
Back in 2010, I applauded Paul Krugman for acknowledging that government unemployment benefits can encourage joblessness.
And I even cited Krugman in this 2012 debate on the topic.
We’re debating this issue again today, but it’s an even bigger problem because politicians in Washington have added a special bonus payment for people who stay unemployed.
So we’re naturally finding that people are more reluctant to work, which is a rational choice for many of them since they’re getting more money for sitting on their butts.
So if Krugman recognized back in 2009 that regular-sized unemployment benefits lead to more joblessness, he must be even more worried about today’s super-sized unemployment benefits.
But there’s a catch. Krugman made his sensible observations on this issue in a textbook when he was still an academic economist, back when he felt some professional obligation to be rational and pay attention to the academic evidence and empirical research.
Today, he’s an ideologue and polemicist. So we get nonsense like this column in the New York Times.
…the Bureau of Labor Statistics announced that the U.S. economy added only 266,000 jobs in April, far short of consensus expectations that we’d gain around a million new jobs. Was this evidence that the economy really is being held back because we’re “paying people not to work”?
No. For one thing, you should never make much of one month’s numbers, especially in an economy still distorted by the pandemic. …Also, if unemployment benefits were holding job growth back, you’d expect the worst performance in low-wage industries, where benefits are large relative to wages. …on the face of it the data don’t support an unemployment-benefits story. So what actually happened? We don’t know. Maybe it was a statistical aberration.
For what it’s worth, I prefer the sober-minded analysis available in editorials from the Wall Street Journal.
Such as this one.
Employers nationwide have complained for months that Washington’s $300-a-week bonus has made it harder to find willing workers. Yet Mr. Biden brushed aside the complaints, saying he and his staff “don’t see much evidence” that the payments are a “major factor.”
…The perverse incentive of the bonus is clear, and the evidence goes beyond the anecdotes from tens of thousands of employers. …Bank of America economist Joseph Song notes that any worker earning less than $32,000 annually would get a raise by going on unemployment… The President intended his remarks to depict his Administration as the driver of job growth instead of its main hindrance. It was a tall order. But the bright side is that his urgent appearance showed that more Americans are figuring out that when the government pays people not to work, millions choose not to.
The good news is that some governors are opting out.
Here are some excerpts from a report in the Washington Post.
An unexpected slowdown in hiring nationwide has prompted some Republican governors to start slashing jobless benefits in their states, hoping that the loss of generous federal aid might force more people
to try to return to work. …Arkansas on Friday became the latest to announce plans to cancel the extra benefits, joining Montana and South Carolina earlier in the week… Indiana Gov. Eric Holcomb signaled to local reporters that the state could soon follow suit, while Arizona Gov. Doug Ducey is considering the same.
I’m tempted to comment about the Post‘s usual bias (saying GOP governors want to “slash” when they’re simply proposing to return to regular-sized benefits).
But let’s stick to the topic.
Here’s another interview on the issue, but it’s about the current fight rather than the Obama-era fight.
I’m especially concerned, as I noted in the interview, that bad government policy may erode the work ethic.
I’ll close with a comment about the fight we had during the Obama years. Back then, the battle revolved around extended unemployment benefits rather than turbo-charged benefits.
Republicans eventually prevailed in blocking the extended benefits. So what happened? As you might expect, there was an increase in employment.
P.S. I imagine this story from Michigan and this example from Ohio will ring a bell with many people because they have some relative or buddy who also has used government benefits as an excuse to stay unemployed.
P.P.S. Senator Rand Paul and I wrote about this issue back in 2014.
P.P.P.S. For some unintentional humor, Nancy Pelosi actually argued that the economy is stronger when people are paid not to work.
Many academic studies show that extending unemployment benefits lead to more joblessness!!
To Be Genuinely Compassionate, Politicians Should Focus on Job Creation, not Unemployment Benefits
January 10, 2014 by Dan Mitchell
Washington is in the middle of another debate about redistributing money.
But that’s hardly newsworthy. Politics, after all, is basically a never-ending racket in which insiders buy votes and accumulate power with other people’s money.
The current debate about extending unemployment benefits is remarkable, though (at least from an economic perspective), because certain politicians want to give people money on the condition that they don’t get a job. Needless to say, that leads to a very perverse incentive structure.
There is a problem with joblessness, to be sure, but it’s misguided to think that extending unemployment benefits is the compassionate response.
Senator Paul and I wrote a column for USA Today about a better way of helping the unemployed. Looking at the empirical evidence, we argue that it’s time to unleash the private sector by reducing the burden of government.
We started with an assessment of the labor market, which has been dismal under Obama’s reign.
The nation is enduring the weakest recovery since the Great Depression, 11 million people remain unemployed, and millions more have dropped out of the labor force. For minorities, it’s even worse. The black unemployment rate is more than twice that of whites. And the weak job market means that even those who are employed are having a hard time climbing the economic ladder.
We explain that more unemployment benefits is a misguided approach.
There’s a lot of talk about helping those down on their luck, but there’s a big divide on the best approach. Our view is that America needs a growth agenda based on reducing the burden of government. The unemployed need a strong job market, not endless handouts that create dependency. …There’s an understandable desire in Washington to “do something,” and extending benefits once again certainly is the easy route for policy makers. But if we are serious about keeping workers out of the long-term unemployment trap, we must have a debate about which policies cause unemployment and which policies create jobs.
The column cites many of the academic studies showing that unemployment benefits lead to more joblessness.
I’ve made this point during television interviews, and this Michael Ramirez cartoon echoes our thinking in a more entertaining fashion.
And we definitely can’t overlook this superb Wizard-of-Id parody. It doesn’t focus specifically on unemployment benefits, but it makes a great point about labor supply incentives.
But let’s get back to the column. Our main goal is to identify the types of policies that would generate jobs and growth.
Simply stated, genuine compassion should be defined by helping people get back to work so they don’t need to be wards of the state.
And easing the burden of government is the best way to make that happen. Our column looks at some evidence – from both overseas and here at home – about the policies that are associated with better economic performance.
Big government is responsible for today’s unemployment situation. …Since President Obama was elected, we have spent $560 billion on unemployment benefits. It’s likely many more jobs would have been created had the government not diverted that money from the economy’s productive sector. …Instead of copying stagnant European nations with bigger public sectors, we should learn from countries that have achieved better performance by lowering the burden of government. Singapore and Hong Kong are examples of jurisdictions with small governments and free markets that enjoy strong and sustained growth with very low levels of joblessness. …look at Canada, which has significantly boosted its jobs market with pro-growth reforms, or Switzerland, which has cemented its traditionally strong labor markets with reforms to control the growth of government. This is not a partisan argument. Or at least it shouldn’t be. The United States enjoyed strong levels of job creation during both the Reagan and Clinton years. But in both cases, public policy was largely the same, featuring an increase in economic freedom.
Some people may wonder whether Reagan and Clinton belong in the same category.
Well, as illustrated by this chart, they both presided over periods with impressive job creation.
And they both presided over periods with generally good economic policy.
Reagan moved the country in the right direction on purpose. Clinton, by contrast, may have wanted to move the nation in the other direction, but he was unsuccessful.
Indeed, the evidence is very strong that the overall burden of government fell during his tenure.
Whether by accident or design, America needs another period of free markets and shrinking government.
For further details on the recipe for good policy, here’s the video I narrated for the Center for Freedom and Prosperity, which explains the conditions that lead to strong and sustained growth.
Free Markets and Small Government Produce Prosperity
Uploaded on Feb 17, 2009
Now that the so-called stimulus has been enacted, hopefully policy makers will turn their attention to policies that actually improve economic performance. This Center for Freedom and Prosperity Foundation video reviews the key finding in the Fraser Institute’s Economic Freedom of the World and explains that, contrary to the policies of Presidents Bush and Obama, smaller government and free markets are the way to boost economic growth. For more information: http://www.freedomandprosperity.org
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P.S. I’m obviously a fan of Senator Rand Paul. Not only does he choose good people as op-ed partners, he also gave me public credit for a good Obamacare joke.
P.P.S. On a separate topic, I wrote in December 2012 that the strongest evidence for media bias is which stories get covered. A perfect example is that journalists already have given 17 times as much coverage of the Chris Christie “bridgegate” scandal as they gave to the IRS scandal over the past six months
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