In his debut column, Democrat Malcolm-Wiley Floyd argues that extending benefits for the unemployed will bolster the economy.
Malcolm-Wiley Floyd, Staff Writer
Ideology: Moderate Democrat | Writing From: New York City
Over the past few weeks, many pundits have pointed to a series of signs that our reeling economy is slowing pulling out of the longest and deepest post-war recession. The Dow index, which fell below 6500 in March, has climbed all the way back above 9000. Investment banks such as Goldman Sachs and J.P. Morgan, hit hardest during this recession, are posting strong profits and repaying their debts to the government. Housing, too, is beginning to rebound: new home sales have picked up for three consecutive months. Even the media has shifted focus away from the economic crisis to the healthcare debate and other issues. However, 9.5% of our adult population has an excellent reason to remain concerned about the crisis: they are still unemployed. Worse, the ranks of the unemployed could swell past 10% of the population for the month of July. Unemployment insurance is a crucial support to these individuals as they search for new jobs, and is necessary to protect our economy’s fledgling comeback.
By the end of this year, unemployment insurance will run out for as many as 1.5 million Americans, according to the New York Times. Millions of Americans depend on unemployment insurance to keep gas in their cars and food on the table. Without it, the lucky ones would likely take jobs ill-suited for their level of expertise: imagine accountants taking telemarketing jobs or nurses waiting tables. Underemployment is bad for the individual and for the community. The individuals then get trapped outside of their career path after a recovery, and are forced to accept a lower income level and level of prosperity. The community suffers since there are fewer nurses and accountants than there ought to be. Worse, the unlucky ones who perhaps were waiters before the recession remain unemployed and risk falling into destitution. However, as long as people have unemployment insurance, they can afford to look for a job for which they are well qualified.
With this reasoning in mind, Congress has extended unemployment insurance to as long as 79 weeks in some states. These decisions were easy for Congress to make, as reporters screamed about a new Depression and the stock markets fell off the charts. It will be harder for them to extend it again as Rep. Jim McDermott has proposed, for the deficit hawks grow louder and louder and the media has shifted focus. Some argue that extending unemployment insurance will slow the recovery by incentivizing jobseekers to stay unemployed. Others argue that the cost of such an extension, estimated at $40 to $70 billion by McDermott, would be too great a blow to the nation’s reeling fiscal health.
Both claims should be ignored. Since the jobless rate is about twice the full employment rate (often estimated at about 4.7%) and rising, it’s too early to consider the effects of unemployment insurance on raising unemployment. Once unemployment has clearly peaked and is falling again, capping unemployment insurance makes sense to insure that people don’t take advantage of the safety net. Until that point, unemployment insurance is necessary to insure that jobseekers are supported while they hunt for the job that is best for themselves and the community.
Deficit hawks should also be ignored since an expansion of unemployment insurance will likely act as a fiscal stimulus, since the injection of federal money will be pumped through the economy. The mark of an effective fiscal stimulus is that money is spent and not saved. The best way to achieve this goal is to give the money to people who are least well off since they must spend the money they receive on the essentials – food, gas, etc, and can’t afford to save it. Therefore a fiscal expansion in the form of the extension of unemployment benefits will boost the economy, and is worth the increase in public debt.
There’s a certain hopelessness that goes along with being unemployed in America. So many people derive their self-worth and identity from their job and from providing for their families. In this current crisis, there are many dedicated jobseekers who have been unemployed for over a year, constantly searching and interviewing, constantly facing rejection. These are the people who are due to lose their unemployment insurance benefits first. Congress needs to extend unemployment insurance not only to boost the economy and to promote efficient job seeking, but also to make sure that unemployed Americans don’t give up hope.
Malcolm-Wiley Floyd is an economics major at Harvard University and is an editor for the Harvard Crimson. A New York City native, he is a registered Democrat and is liberal on social issues and conservative with regards to economics and defense.
Unemployment insurance reduces the incentive for people to look for a job. This is factual and the inevitable consequence of having unemployment insurance in the first place.
Unemployment may not “raise unemployment” if workers choose to stop looking for a job. As you know from your macro class, workers that have not applied for jobs in the recent past (disgruntled workers) are no longer part of the “labor force” and thus, their lack of a job does not contribute to the “unemployment” rate (which is unemployed/labor force).
It is not “some” who argue it. It is the logical consequence of economic theory. If you’re willing to trade that off for a “social safety net” that pays people to fail, so be it. But at least have the decency and honesty to say this, rather than simply saying, “we MUST lengthen unemployment coverage because we must do it to strengthen our economy.”
That’s not even an argument. It’s nothing more than political banter. The sooner we can get these unemployed people back to work and use this unused capacity, the better off it will be for the American economy. Incentivizing continued unemployment is not a solution and never will be.
Tim, you clearly have a solid understanding of the very basic economic principles at work here. You are right that unemployment insurance reduces the incentive for people to look for a job, since it lowers the cost to them of being unemployed by maintaining a basic level of consumption. Therefore, if we were at the natural rate of unemployment, extending unemployment insurance wouldn’t make much sense. However, seeing as we’re in a rather deep recession (a claim you did not refute in your comment, so I assume we agree on), most people aren’t unemployed because they are improperly incentivized to find work, but instead because the jobs aren’t out there.
Put frankly, this is an issue of a shortage in demand. Since conusmers are ramping up savings, and therefore spending less, there is a severe shortage in demand for goods and services, which leads producers to scale back production, laying workers off in some cases, instituting hiring freezes in other cases.
So thank you for your comment, but a more sophisticated economic analysis answers a lot of your problems with extending unemployment insurance, without a mention of a need for safety nets or anything like that.
“Put frankly, this is an issue of a shortage in demand. Since conusmers are ramping up savings, and therefore spending less, there is a severe shortage in demand for goods and services, which leads producers to scale back production, laying workers off in some cases, instituting hiring freezes in other cases.”
But that same savings = investment in the future, which leads to not only higher employment, but a lower natural rate of unemployment. So to suggest that we should incentivize consumption and trade off future investment is nothing less than a short run value judgment that today’s consumption trumps tomorrow’s investment.
Nice article M-W. Your analysis of the importance of unemployment benefits is insightful, not merely because you state the logical positive effects of extending insurance, but the fact that you chose to approach the issue from a viewpoint that isn’t strictly bound by economic theory.
Beyond the financial positives, an extension of unemployment insurance sends a message as well. It shows Americans that they’re not being ignored – an essential point that is missing from Tim’s argument. The effectiveness of President Obama’s grassroots politics testifies to the desire ordinary citizens have to be heard and considered. Simple ideas like the ability to keep the lights on and put food on the table give people hope.
Tim – clearly you are an educated person; however, in your haste to display how much you remember from your 11th grade AP Econ class, you forget to see the big picture. Perhaps you were better at micro than macro – who am I to judge? One thing’s for sure – your focus on the theory behind fiscal and monetary policy causes you to view those 9.5% of americans as merely figures on your X and Y axes, rather than individual human beings.
Steven, thanks for highlighting the human aspect of the policy we’re debating. It’s easy to forget that when we’re talking about rates of unemployment, we’re actually talking about millions of Americans who are slowly losing the will to fight this recession.
Tim, I appreciate your quoting me, but the following economic analysis doesn’t make much sense. First of all, monetary policy is in the business of smoothing out the business cycle. Second of all, the natural rate of employment is tied to long-run output, which of course is not affected by increase in investment, as long-run output can only be increased as a result of a change in factor productivity, like one accompanying a technology advancement. Also, the savings-investment identity from the classical model is well too simple for this analysis, as it does not account for net exports, shocks to animal spirits, or the prospect of what economist Paul Krugman has called a “global savings glut.” Once again, a full economic analysis leads me to support extending unemployment insurance.
“Tim – clearly you are an educated person; however, in your haste to display how much you remember from your 11th grade AP Econ class, you forget to see the big picture. Perhaps you were better at micro than macro – who am I to judge? One thing’s for sure – your focus on the theory behind fiscal and monetary policy causes you to view those 9.5% of americans as merely figures on your X and Y axes, rather than individual human beings.”
Steven R., is there any reason to disparage Tim, who, I might add, is pursuing a PhD in economics. I myself am pursuing a joint BA MA in economics at Yale and his point is completely legitimate.
I might add to his argument that unemployment insurance is probably not a wise bet at this point because 1) it will be inflationary (As Floyd pointed out, it would be equivalent to a fiscal stimulus. For you Steven this will shift your 11th grade AD curve to the right.) and 2) a significant number of people are holding out for better positions, but could get a job (albeit not at the same pay-level as their prior positions). Floyd made this seem to be a bad thing and he certainly made a legitimate argument for that. However, I would point out that those people who are holding out artificially inflate the unemployment rate and thus do not deserve more unemployment insurance because they could easily go get work.
correction: “I believe his point is completely legitimate.”
David – I’m so terribly sorry. I didn’t realize I was debating a PhD candidate. I’m so grateful that there are Yale students nice enough to point these things out. Normally, I’d expect students of such pedigree to remain within the exclusivity of the Ivy League bubble. Perhaps had I told you that I am a fellow Ivy Leaguer, you wouldn’t have gone out of your way to put me in my place, but you did and I’m glad.
Not once did I say that Tim was wrong for arguing the point he did. I merely stated that his argument was from a purely theoretical standpoint.
All in all I do appreciate your injection of some good ol’ elitism that everyone enjoys from time to time. When you get a chance, perhaps you could ask your Yale professors to teach you some perspective.
Gentleman, if it’s okay with everyone, I will return to the policy.
David, as far as your second point, we basically have the same analysis but draw different conclusions. I believe that UI should be extended for predominantly economic reasons, the question of desert is one I choose not to ask.
However, your first point, I must contest. Expanding UI would absolutely be inflationary, but to be frank, that’s the point. The Federal Reserve is practicing maximum expansionary monetary policy, but is up against the zero bound. Despite Ben Bernanke’s aggressive quantitative easing, the economy still lags. In fact, many noted economists, notably Paul Krugman and Brad DeLong warned of a deflationary trap earlier in the crisis. The time to worry about inflation scares is well after we’ve completed the economic recovery.
Malcolm- Wiley: You have truly outdone yourself but I think that your “ivory tower” eduction has put you out of touch with the everyday “Joe the Alaskan Moose Hunters.” If you were wondering, that was a stab at his Harvard education and Sarah Palin. But I digress… I would contest that economic unemployment benefits are the wrong way to go. I would argue that better benefits would be in the form of non-monetary forms. For example, the new Healthcare Reform Bill (any way you slice it from either House of Senate) would be increasing unemployment benefits as it would be giving an affordable option to those non-employed. Some might argue that EFCA would increase unemployment benefits as it would make it easier to get a working class American job (as EFCA would help curb the ‘Walmart Effect’).
States are so in debt that they cannot focus on necessary expenditures for their own needs : ie. infrastructure developments not covered under the Stimulus Bill. I think this addresses points brought up by Tim, giving people benefits decreases their incentives. If we give people benefits in other forms, it protects them AND incentivizes them.
So I pose the question to you Malcolm-Wiley Tecumseh Floyd: Do we want to spend money that we don’t have? Or use the programs that we do have? Your move Floyd.