09.30.2009 0

The Barstool Economist: The Disincentive to Work

  • On: 10/07/2009 09:25:22
  • In: Economy

  • The Disincentive to Work

    By Justin Williams

    When a recession hits, the first number everyone keeps a close eye on is the unemployment rate. Every American can relate with those who lose their jobs since it puts both their family and their career in jeopardy.

    But what the government does to try to combat this invariably fails on pretty much every level. Not to mention, it was largely the government intervention that artificially created a false market, propped up inefficient industries, and spawned the inevitable unemployment in the first place.

    And now what the recession is doing in the economy is shifting capital and resources to more efficient uses. That means those people who left their jobs to go pursue this false market (that the government calls “booming” industry) must now be laid off. And that also means fixing the problems that government first created.

    For example, that is exactly what was seen in the recent housing bubble. People left their jobs to become real estate agents or building contractors. And now that the housing market was flooded with supply under the government-created guise of a false demand, some of those people must return to find efficient jobs in limited growth sectors.

    So how does the government respond? Do the politicians whose errant policies spawned a recession admit their malfeasance and let the private sector correct its course? No, they pen H.R. 3548 the “Unemployment Compensation Extension Act of 2009.”

    This act would extend unemployment benefits to “50 percent of the total amount of regular compensation” or “13 times the individual’s average weekly benefit amount” for the year in the 29 states that have unemployment 8.5% or higher. And Congress has decided to pay for this by raising the IRS surtax on the employers that will, in turn, either raise prices or lower wages for all states.

    And that’s not all.

    Economists R. Mark Gritz and Thomas MaCurdy found in their paper “Measuring the Influence of Unemployment Insurance on Unemployment Experiences” that “an individual who collects UI [Unemployment Insurance] is likely to experience a longer spell of nonemployment, at least to the exhaustion of UI benefits.”

    In other words, unemployment insurance does not help alleviate unemployment. It exacerbates it. And that is simply because when people get paid to not work they do not try to find a job as that would result into a loss in benefits.

    Once again this is a case where government means do not achieve the required (and often falsely touted ends. The politicians claim they are attempting to lower unemployment, which in turns increases production but what they end up doing is redistributing money from those who are employed (or in some case consumers, which includes unemployed) and incentivize the unemployed to stay that way through a direct redistribution of wealth.

    A better plan would be to give businesses permanent tax cuts so that they can expand production and hire more people. That is the real plan that would reduce unemployment, increase productivity, and not create yet another large government program adding even more red tape to already overburdened businesses.

    But don’t hold your breath: after all, creating and extending government programs is how politicians keep their jobs!

    Justin Williams is the Senior Commentary Editor of ALG News Bureau and, as always, he accepts questions and comments at jwilliams@libertyfeatures.com

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