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Column: Economic argument for extending benefits

The opposition to extending long-term unemployment insurance rests on three major objections. First, it "pays people not to work." On this view, it's a safety net that after a while becomes a hammock, with workers slacking off in their job search because the insurance money is plenty to live on. Second, the federal budget is already in deficit and should not be made worse by this additional cost. Any extension should require that an equal amount of other government spending be cut. Third, there is no plan to put people back to work, and thus extending unemployment insurance is futile.

It is designed precisely not to create a hammock. Rather than pay people not to work, unemployment insurance pays people only if they are looking for work, and pays them at a rate far less than they were making while working.

Since it costs time and money to search for work, the payments make it more feasible to continue the search process. True, the payments make job seekers somewhat less desperate, but that means they have time to search within the skill set they previously acquired.

Without unemployment insurance, job-seekers would be more likely to accept employment requiring considerably lesser skills. Not only would job-seekers over-crowd and depress the wages in those lesser skilled segments of the labor market, some of their "human capital" would atrophy through disuse, and a vital asset to both the worker and the economy would be lost.

Another key problem with the hammock analogy is that data show that not enough jobs are out there to employ the long-term unemployed. Currently, the number of job-seekers remains roughly three times the vacancy rate, making it arithmetically impossible for all the unemployed to find work in today's economy.

Normally after the worst of a recession, the number of job vacancies and the number of job-seekers come into rough equality in about two years. Not so today. Consequently, rather than tie the cut-off of unemployment insurance to a specific time period, we should instead tie it to prevailing economic conditions at the time such a cut-off is being contemplated. Fortunately, forecasters are predicting improved economic conditions in 2014, so perhaps better times will bring job vacancies and unemployment rates into agreement. Rather than lose patience with the long-term unemployed, we should wait until economic conditions improve before cutting off their lifeline.

Aside from the hammock story, U.S. House Speaker John Boehner has a two-part objection to the extension of unemployment insurance. First, he claims that we should have a policy that will put people back to work. The irony is that for the past five years President Barack Obama has been promoting an infrastructure repair and maintenance program that would not only provide badly needed investment in our public assets — roads, broadband, ports, school buildings, sewer and water systems — but would also increase the demand for labor. Repair and maintenance of these long-lived capital assets would give a lasting boost to the productivity and global competitiveness of the U.S. economy.

To gain these benefits all we need do is repair the infrastructure that our predecessors built. Doing this would be just the sort of jobs program that the speaker claims he wants but has blocked reflexively for years, helping to extend the time that unemployment insurance is needed.

Second, Boehner seeks to pay for the extension of unemployment insurance with a matching reduction in spending elsewhere in the budget. By demanding such a "pay for," he denies the importance of total spending, including government spending, in sustaining economic activity. Economists estimate that to "pay for" a proposed extension of unemployment insurance would require reducing government spending by $6 billion over three months, and $24 billion for the year.

For a one-year extension, such cuts will reduce GDP by 0.2 of a percentage point, reducing employment by 200,000 jobs. "Pay For" creates a problem instead of solving it: inhibiting progress toward full employment that would allow unemployment insurance benefits to be safely stopped.

We are paying heavily for the failure to apply basic economics. The policy of "pay for" requires us instead to "pay more."

William L. Holahan is emeritus professor of economics at the University of Wisconsin at Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of Economics for Voters. They wrote this exclusively for the Tampa Bay Times.

Column: Economic argument for extending benefits 01/17/14 [Last modified: Friday, January 17, 2014 5:33pm]
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