07.22.2010 2

Perverse Incentives and Fiscal Consequences of Unemployment Benefits Omitted from News Coverage

By Kevin Mooney — Will the extension of unemployment benefits further add to the deficit and undermine long term economic prospects? Or, will congressional action help cushion out of work Americans who could lose out on future payments? These questions are explored in  recent news reports appearing in The New York Times and other major media outlets.

The U.S. Senate voted 60-40 this week to end debate on jobless benefits, which all but assures final approval. With the exception of the usual suspects from Maine, the GOP opposed extending benefits in the absence of offsetting spending cuts.

“Republicans said they supported providing more jobless pay for struggling Americans but argued that the costs should be offset with spending cuts elsewhere to avoid adding to rising federal deficits,” a Times report says. “They proposed that money not yet spent from last year’s economic stimulus plan be used to cover the costs.”

This suggestion appears to be a non-starter for Democrats. Millions of America are already experiencing a delay in benefits and unemployment numbers remain high in areas of the country that could be politically competitive come November.

“Democrats argued that diverting stimulus money would weaken federal efforts to create jobs for the very people they were helping with the unemployment pay,” according to the report. “They said unemployment pay had often been treated as an emergency need free of any deficit considerations.”

There is a throwaway line here that deserves some attention. Normally, proposals to extend benefits are politically popular but this has not been the case where unemployment spending is concerned.

“The difficulty that Democrats had in moving ahead with what has traditionally been a popular vote has forced the leadership to scale back expectations for what it can yet accomplish this year given the requirement to produce at least 60 votes in the Senate on every bill,” The Times acknowledges.

Thus far, Republican lawmakers are sticking to their guns. They may sense a political opening connected with the public’s rising anxiety over deficit spending. While it is helpful and informative for The Times to report on the politics of unemployment benefits, it would be helpful to focus more attention on the economic fallout.

As it turns out, Sen. Tom Harkin, an Iowa Democrat, has provided The Times with an ideal opening. He is very dismissive of the idea that unemployment benefits could create perverse incentives for Americans seeking work. He is quoted at length but his assertions go challenged.

Eileen Norcross, a senior research fellow with the Social Change Project and the lead researcher on the State and Local Policy Project with the Mercatus Center, has written at length about the economics of unemployment benefits. A follow up report that juxtaposes her comments with Sen. Harkin’s could open the way to informative policy discussions.

The following commentary from Norcross on the “Costs and Consequences of Unemployment Benefits” is worth careful consideration:

“The perverse incentives of unemployment benefits are well documented. Subsidizing unemployment draws out a job search. Generous benefits that subsidize “temporary idleness” may result in `chronic idleness.’ As the state makes chronic idleness more attractive, more and more people will choose that option over productive employment. As people remain unemployed, their decreased spending will slow production throughout the economy, and the system will become less and less sustainable. In addition to these relatively short-run dangers, unemployment benefits can create a more serious long-run consequence known as hysteresis, or systemic long-run unemployment. As workers remain out of the job market for longer periods,  their skills become obsolete and the likelihood of remaining unemployed increases. As unemployment becomes acceptable, the natural rate of employment and production falls, resulting in a less-skilled workforce.”

Political figures who put weight into instant policy gratification as opposed to long-term costs should be called out in print for economic illiteracy that  jeopardizes the financial well being of Americans they claim to champion.

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