Was extending unemployment compensation a good idea.
I just received a letter from my Congresswoman. In it she explained why she voted for the extension of unemployment benefits. As she notes in the letter "Who doesn't have a cousin or a friend, or even a son or daughter, who through no fault of their own, lost their job because the economy fell so hard and the recovery isn't yet strong enough to enable them to find another position." She explains why unemployment compensation is a good thing: “In circumstances like these, where the alternative is to leave people at risk of losing their homes, being unable to pay their bills or feed their families, we need to provide stability to Americans who are looking for jobs and for our local economies."
How could anyone be so heartless as to argue against extending unemployment benefits for up to 99 weeks in the current depressed economy? This, however, is the wrong question to ask. Extending unemployment benefits is not about caring enough to provide financial assistance to someone in need. It is about paying unemployed workers with money taken from taxpayers- actually money borrowed by the government that will eventually have to be paid by future taxpayers. Thus this policy involves coercing people (unspecified future taxpayers) to pay for a government program so that those who support it can get a warm feeling that they have done something compassionate.
Let’s go beyond the emotional argument and consider the economic consequences of extending unemployment benefits. The two main arguments against extending unemployment benefits are (1) that it will increase the incentive for people to remain unemployed, thereby slowing the economic recovery and (2) there are better ways to help the unemployed who cannot find a job and do not have enough money to pay their living expenses.
For an explanation and evidence about how unemployment compensation stimulates unemployment see my colleague Shawn Ritenour’s recent blog on the subject. http://foundationsofecon.blogspot.com/2010/07/unemployment-compesation-stimulates.html
Richard Posner, in a recent post of the Becker-Posner blog, http://www.becker-posner-blog.com/2010/07/against-extending-unemployment-benefitsposner.html argues that a better way to help the unemployed is to provide means-tested benefits. He notes that some of those who are unemployed have spouses earning high incomes or have large savings. Providing assistance only to those who face economic hardship as a result of unemployment would cost less and also not reward people who have difficulty finding or keeping jobs because of inadequate effort.
It is not clear why the government should provide any assistance to those who are unemployed beyond what can be paid for out of the money raised by the state unemployment compensation funds. Supporters of this bill emphasize that this is not a handout because workers are making a claim against insurance that they purchased when they had jobs. Like any insurance policy, unemployment compensation has limits on how much an employee can receive. These limits specify the amount and number of weeks workers may receive benefits. Congress voted on extending benefits by allocating money from the federal treasury because state unemployment compensation funds would go bankrupt without infusions of general fund revenue. Thus, an extended benefit is not an insurance payment, but another government transfer program that adds to the burden of debt on future taxpayers.