|WACO, January 15 - Yet another battle is underway in Washington: what to do about long-term unemployment benefits.
(By the time you’re reading this, there may have been some meaningful progress toward a long-term strategy, but I’m not holding my breath given that two proposed compromises in the Senate just fell apart and it is unlikely to even come back up for a couple of weeks.) At issue is whether to reinstate the federal emergency aid program to provide benefits for persons who have been collecting unemployment for longer than their state maximum time period (generally about 26 weeks). Some 1.3 million people lost benefits on December 28 with the program’s expiration, and more pass the 26-week limit all the time.
Unemployment insurance has been around since the birth of notable countercyclical policies in the 1930s. Basically, if you lose your job through no fault of your own, you can receive a fraction (generally about half) of your previous salary for a limited period of time. States fund most of the program through proceeds from a tax on employers earmarked for that purpose. The U.S. Department of Labor oversees the program, and federal support for extra benefits during recessions has been a common practice. The advantages of offering this safety net for displaced workers are clear, though questions arise when the specifics of the program come under scrutiny (particularly how long people should be eligible).
States can set their own parameters to some extent; weekly maximum amounts and weeks of eligibility vary widely. Texas falls somewhere in the middle of the pack, with a maximum weekly benefit of $454, and the Texas Workforce Commission (TWC) paid out $3.8 billion in unemployment benefits during the fiscal year ended August 31, 2013.
The Commission took in about $2.7 billion from the unemployment assessment and $1.5 billion in federal funds (plus a bit more in “other” income). Fortunately, the strength of the Texas economy is keeping the TWC on relatively stable financial ground; in some states, a major problem is brewing, with unusually large payment obligations and lackluster unemployment tax receipts.
The most recent round of Emergency Unemployment Compensation was implemented by Congress in June 2008. It was reauthorized several times, but ultimately expired at the end of last year. Now, a loud debate has ensued as to what should be done. The human cost is obvious; the economics are less so.
One problem that occurs in analyzing this issue is that it’s impossible to predict what happens when people lose benefits. Does this mean they take a less-than-ideal job, but at least get back to work? Or do they quit entirely and retire? Move to another social program? The decision will vary by individual, and the ultimate fallout for the economy is hard to predict with certainty (particularly since the current period of extensions is in uncharted territory). Unfortunately, hiring is still sluggish in many parts of the country, and options for jobs (any jobs) are clearly limited for many of the long-term unemployed. Moreover, many workers find their skills obsolete and are in need of training. Even so, unemployment insurance (and even the additional long-term benefit) was never designed to be a permanent source of income, and there are already other programs aimed at filling this need.
One of the most disturbing arguments I’ve heard in favor of extending benefits is that every dollar paid leads to $1.50 in economic growth. Clearly, the payments do lead to an economic stimulus as they are spent, and the illustrations coming out of Washington (such as the recipient turns up the heat and the electric company can therefore hire more workers, or goes to the store to buy groceries so the store can now hire another person) have a grain of truth.
However, this assertion is a blatant misuse of the concepts of spillover benefits to the economy and multipliers. I and my firm have conducted thousands of studies over the past three decades which measure these relationships. The basic idea is that every economic stimulus (whether opening a new company, building a new building, hiring some additional workers, or spending an unemployment benefit check) leads to multiple rounds of additional economic activity. If I build a new house (the initial stimulus), I buy various inputs such as concrete, lumber, professional services, and much more. The concrete company, in turn, has purchased loads of cement and aggregate from various vendors, a truck from a dealer, diesel fuel from a wholesaler, and so on. The company which made the cement purchased the raw material, bags, fuel to run their equipment, and whatever else they use to produce the cement. It continues. Also, there are people earning a wage/salary at all points along the way.
While it is true that an investment of public funds can sometimes return more than it costs, the sound bites of prominent people in Washington only speak to one side of the equation. The key question is “what would the overall effect be if the funds were spent elsewhere?” If $1 spent for unemployment benefits leads to $1.50 in economic activity, what might that $1 generate if it were spent for another purpose? What if the money went into construction projects? Scientific research? Or stayed in the hands of private citizens and corporations for them to spend or invest as they choose? All of these uses and many others generally have much larger economic impacts than consumer spending.
There are viable reasons to extend long-term unemployment benefits (chiefly among them the relief for those receiving these inflows of funds). However, it is disingenuous at best to imply that such transfers represent a good way to grow the economy. They are not!!
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.