To Get More of Something (e.g., Unemployment), Subsidize It
By Robert Higgs • Friday November 21, 2008 1:22 PM PDT • 8 Comments
Ronald Reagan was no economist, but his economic logic was impeccable when he declared, “If you want more of something, subsidize it; if you want less of something, tax it.”
So, as the current recession deepens and the rate of unemployment rises, we might have confidently predicted that Congress, in its infinite compassion for the little guy, would extend the period during which the unemployed may collect unemployment-insurance benefits. President Bush signed a bill today that will provide as many as 13 weeks of additional benefits, on top of the additional 13 weeks of benefits approved last June, which was on top of the 26 weeks the basic program provides.
The Associated Press notes that ”Congress has enacted federally funded extensions seven times in the past 50 years during economic slumps – in 1958, 1961, 1972, 1975, 1982, 1991 and 2002.” Thus, this particular sort of counterproductive economic policy is almost as predictable as the sun’s rising in the east.
The availability of unemployment benefits reduces the cost of remaining unemployed, and therefore increases the amount of unemployment that workers choose. They more readily turn down existing job offers, in hopes that with additional time to search, they will find better ones. Or they simply take life easy for a while, not searching seriously at all. More people are happy to do nothing if they can collect a payment for doing nothing.
The Associated Press report also states: “The measure is estimated to cost about $5.7 billion, although economists put the positive impact at $1.64 for every dollar spent on jobless benefits because the money helps sustain other jobs and restores consumer confidence.” It’s good that the economists responsible for this estimate remain anonymous, because the nonsense it expresses brings no credit to their professional reputation.
Think about it: according to this claim, every time the government takes a dollar from earners and hands it to someone for not working, there’s a net gain of 64 cents. (In a spirit of professional generosity, I am ignoring the large costs of processing this transfer as well as the large deadweight cost associated with any tax.) So, why don’t we insist that the government tax more and more money away from those who earn it, and hand the loot over to those who are not working—after all, that net gain of 64 cents per dollar continues to beckon, does it not?
In a word, no, because a nasty little consequence will certainly ensue. As the tax increases, fewer people will choose to earn income; and as the handouts increase, more people will choose to stop working and collect the dole. Before long — yes, you guessed it—nobody will be working and everybody will be collecting a government payment for not working. It’s the paradise of which every social democrat has always dreamed.
Well, okay, maybe this scheme will run into some problems before it reaches nirvana. Maybe the problem will turn out to be the pesky fact that before the recipeints can consume (which requires getting something of value in exchange for their unemployment-benefit dollars), somebody must have worked to produce those goods and services. Little things like the need to produce (hence the need to save, invest, and work) before consuming and the need to provide incentives to the savers, entrepreneurs, and workers tend to get lost in the shuffle of modern mainstream economics, especially macroeconomics, where the narrow focus on the short run leads analysts to take for granted the economy’s potential to produce.
In any event, we may expect unemployment to increase as the recession grows worse, and we may confidently understand that a portion of the unemployment that exists at any particular time will be attributable to the availability of unemployment-insurance benefits. Congress will blame the market for the unemployment and take credit for, in effect, helping to increase and extend it.
Tags: Budget and Tax Policy, Economics, Employment, Labor, Politics, Taxation, The State, Welfare 
Congress will take credit for helping to increase and extend [unemployment]?
Typo?
Grant Reiner | Nov 21, 2008 | Reply
No typo. Congress will take credit for extending the period of the benefits, conveniently ignoring the actual effect of that extension on the amount and duration of unemployment. (That’s why I wrote in the final sentence “in effect.”)
Robert Higgs | Nov 21, 2008 | Reply
“Congress will blame the market for the unemployment and take credit for, in effect, helping to increase and extend it.”
Congress makes its living helping the helpless (as defined by themselves). If you personally benefit from servicing a particular market, and your market is helpless people, then of course it behooves you to do as much as possible to create the conditions in which that market will expand.
Harpo and Zeppo | Nov 21, 2008 | Reply
Mr. Higgs, when the ‘market’ of everything has been so distorted such as with the $750B bailout which will give bankers, etc., huge bonuses, etc.
can anything such as helping people who have lost their jobs make any difference? You mentioned seven instances where congress had extended the benefits but that didn’t wreck the system, did it? Wasn’t it wrecked initially in 1913 and then at a rabid pace since 2000 with the wars and the alphabet soup initiated by bankers and perpetuated by insurance companies, loan companies, etc.? I know two wrongs don’t make a right but I think blaming Social Security, Medicare, unemployment compensation and all the social programs is now, in 2008, at the bottom of the list for cause or correction. We need to flush Washington and Wall Street for correction...which isn’t going to happen. So why not help the little guy? That seems a drop in the bucket to me.
By the way, I am self-employed so I am not pleading my own case. In fact, I have never drawn unemployment compensation. I’m just offering a different perspective from someone who would totally agree with you in ordinary times.
jan clark | Nov 22, 2008 | Reply
I totally agree with the premise of the article. However, a few other things should be made clear so that people can actually understand how unemployment insurance, or unenjoyment works. First of all unemployment insurance is based on employer taxation. Each employer pays in an amount from 1% to 10% of the wage of it’s employees. This is filed and payed by the employer based on the amount of unemplyment insurance that has been payed out in the last year. For example if company A had zero unemployment last year it continues to pay a 1% tax on each dollar of wage. If they have layoffs or fire people it goes up depending on the amount of workers who file for unemploymnet insurance. All of these payment are put into one fund and drawn off of whether or not each business has put in enough to cover the benifits of their employees.
This means that for each business there are various outcomes. For seasonal employers who always have layoffs and theirfore know that they will always be paying in the 10% It’s simply a way of retaining employees who might otherwise find another job. My friends call this unenjoyment. They don’t have to work or even look for work in the off season. They hunt ice fish or just lay around the house.
Other businesses that rarely have layoffs still pay the 1%, they are in affect subsidizing the other companies. but this still has another effect. Businesses that are used to paying only 1% don’t like to fire people because they may get stuck paying the 10% for the next year, even though they have no layoffs.
As you can see each business must work out what is best for them. In my business I am not seasonal and don’t have layoffs. I am loath to fire even the incompetent. So I simply cut their hours (the incompetent) and pay untill they are willing to quit. Therfore, I avoid the unemplyment tax increase. I am also more likely to pay overtime in the busy parts than hire extra employees that I will lay off, and then pay extra insurance on.
The extension of the benefits throws things out of whack. It’s unfair to employers as it’s a change in contract without my permission. I may be willing to fire an incompetent employee and pay the insurance for 16 weeks, but now I’m stuck paying for more weeks without my consent!
And for all you employees out there who think it’s a good deal think again. Although it’s me who files the paperwork it’s you who actually pays the tax. Trust me any employer who knows how it works figures this into the amount of money they can pay you. If I am stuck paying more for insurance I have less to pay you. This means no raises or more demands for productivity. So it’s you who are subsidizing the lazy or unproductive.
Changing the rules in the middle of the game is unfair to both employers and employees.
The simple solution is to allow employers to opt out of the system altogether if they choose. Of course they would need to inform employees of this so they can make up their mind where they wish to work. Some employers may wish to continue, they will need to pay more. Others may wish to opt out so they no longer need to subsidize the system that doesn’t work for them.
It’s not an easy choice for employers how they handle the situation and extending the benifits makes the decisions even harder.
Peace!
Brad Smith | Nov 22, 2008 | Reply
Congress will DESERVE credit for extending unemployment, though I doubt they will willingly accept the credit.
Anyone with half a brain will think congress SHOULD take the blame for extending unemployment, because they know that that is the truth.
Thanks for a great article, Mr. Higgs.
Grant Reiner | Nov 22, 2008 | Reply
Sorry, I should have written “Dr.” Higgs in my last comment.
Grant Reiner | Nov 22, 2008 | Reply
Bailout 2008, a poem by David Jeffrey from Canada
Like a bloodied warrior,
laying broken and torn.
Like a dying soldier, hopeless and forlorn.
But the blood, it be green,
the color of money.
And the soldier is an economy,
and it is anything but funny.
Broken are it’s people and shattered are their dreams.
Thanks to the ultra rich and their full proof schemes.
It is a tragedy with more pain to come.
Finance will be Hell, and their wills will be done.
Seamless | Nov 29, 2008 | Reply