Yesterday, The Wall Street Journal’s Laura Meckler asked White House press secretary Jay Carney, “I understand why extending unemployment insurance provides relief to people who need it, but how does that create jobs?”
Oh, uh, it is by, uh, I would expect a reporter from the Wall Street Journal would know this as part of the entrance exam. (laughter)
But the—no, seriously. It is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren’t earning a paycheck are going to spend the money that they get. They’re not going to save it; they’re going to spend it. And unemployment insurance, that money goes directly back into the economy dollar for dollar virtually.
So it is—and when it goes back in the economy, it means that everywhere that those people—everyplace that that money is spent has added business. And that creates growth and income for businesses that then lead them to making decisions about job—more hiring.
But according to a report by Heritage’s James Sherk and Karen A. Campbell, unemployment insurance leads to longer periods of unemployment and do not provide the promised stimulative effect:
Extended unemployment insurance benefits provide little economic stimulus. The models that claim that unemployment benefits strongly stimulate the economy ignore the effect of UI [unemployment insurance] in increasing unemployment and overestimate the amount that finances new consumption. Consequently, they overstate the economic stimulus that extended UI benefits provide.
People respond to incentives. Paying workers not to work does not stimulate the economy. Because the increased benefits will most likely be financed by debt, they simply transfer resources from future taxpayers to UI recipients. The lost production resulting from increased unemployment diminishes the effect of this spending, resulting in a negative return. Receiving less GDP than is spent cannot sustain economic growth.
That’s not to say there aren’t other reasons for extending unemployment benefits. As Sherk and Rea Hederman, Jr., explain in a new paper, the average duration of unemployment hit a new record last month, surpassing 40 weeks for the first time ever. Undoubtedly, the weak economy and the prolonged unemployment is causing significant hardship on American families, and Congress has many humanitarian justifications for extending unemployment benefits. But, Sherk and Campbell write, policymakers should not expect extended UI benefits to improve the economy.
Read Sherk and Campbell’s paper Extended Unemployment Insurance—No Economic Stimulus at Heritage.org.
Source material can be found at this site.