1.3 Million Lose Unemployment Benefits Saturday

1.3 Million Lose Unemployment Benefits Saturday

on Fri, 27 Dec 2013

On Saturday, an estimated 1.3 million long-term unemployed Americans will lose their unemployment insurance benefits. For the first time since 2008, Congress failed to extend the benefits went it passed a budget just before Christmas. The Obama Administration has warned that more than 4 million unemployed could lose benefits next year unless Congress passes another extension. 

In the past, states provided unemployed workers with up to 26 weeks of benefits. At the start of the recession, the federal government provided extra weeks of assistance. During the depths of the recession, federal and state governments provided 99 weeks of cash payments. For those keeping score at home, that is almost 2 years of financial assistance. The average benefit is around $1,100 a month. 

The expiration of benefits for the long-term unemployed has already sparked a round of finger-pointing in Washington. On Friday, the left-wing Huffington Post put much of the blame on Democrats. "The record indicates that Democrats were late to show up, distracted in part by other concerns," HuffPo reported. "A month and a half before the deadline, few members of Congress or administration officials were even talking about unemployment insurance."

Extending the benefits for another year would cost the government $25 billion. The left argues that this assistance helps the economy, by giving the unemployed cash to purchase consumer goods. The Congressional Budget Office has even estimated that extending benefits for the unemployed creates around 200,000 jobs. 

This argument is absurd. It is the fiscal policy version of the "broken windows" economic fallacy. If all my windows were broken, I would have to spend a lot of money replacing them. This would theoretically boost the economy by providing work for glaziers and other workers. This does not factor, however, what else I could have done with my money. It is likely that it could have been spent or invested far more productively than simply replacing what I already had. 

If the government wants to extend unemployment benefits for another year, it will have to borrow $25 billion. The cost of this will actually increase over time, as the government pays interest on this debt. These are resources that can't be used for anything else, whether its infrastructure improvements or tax reform. 

A bigger problem than the duration of unemployment benefits, is the number of the long-term unemployed. More than 4 millionAmericans looking for work have been unemployed for more than 27 weeks, beyond the time-frame of traditional unemployment insurance. The recession officially ended more than 4 years ago. Such a large number of long-term unemployed suggests deeper problems with the economy than can be fixed by simply adding additional benefits. 

Absurdly, at the same time the left is pushing for an extension of unemployment benefits, it is also pushing to hike the minimum wage. If someone has been unemployed for 99 weeks, mandating higher wages is unlikely to be of much help. Minimum wage hikes, at least at the margin, have a negative impact on job creation. 

Extending unemployment benefits may itself be counter-productive for job creation. A landmark study from Sweden found that more generous unemployment benefits increased the rates of unemployment. The relationship was very robust. Every 1% point increase in benefits increased unemployment by 5%.  

In 2007, Sweden reformed its unemployment insurance system. The government provides 60 weeks of benefits, but on a sliding scale. The longer someone is unemployed, the less they receive in assistance. This system provides a powerful incentive to find work. 

It is perhaps telling that, in 2013, we are in such a state that American lawmakers should look to Sweden for economic reforms.