Mike’s Financial Pocket: 5 Reasons Why Unemployment Benefits Should Not Be Extended


The new crusade by President Obama is an extension of the recently-expired unemployment benefits — which is somewhat ironic, because the “unemployment rate” is expected by some to drop below 7% for the first time in over five years on Friday, when the BLS reports on December’s job situation. Before we get the good news from the media and the President about how awesome the economy is, we get to heat about how bad the employment situation is and how we need to extend unemployment benefits. Here are five observations in that regard, which lead me to conclude that extending unemployment benefits beyond what they already are (26 weeks) is a bad idea:

1. Long-term unemployment is still elevated, despite the extension of benefits and the recession ending over four years ago.

The above chart shows how bad long-term unemployment still is despite the recession ending in 2009. It’s hard to argue that extended unemployment benefits have “helped” people, unless your definition of “help” is pretty weak. Here’s what I mean. In order to help somebody on unemployment, that person needs to get a job. A real, good paying job, preferably in their area of expertise or doing what they did before they were unemployed. Offering a handout to help pay bills is certainly something which may be “helpful” or which is necessary for them in the short-term, but it does not solve the underlying problem, which is a weak economic recovery.

The question is: why are employers not hiring? I have an idea — excessive and expensive regulation.

2. Employers are holding back from hiring because of government regulations, particularly Obamacare.

It is indeed a cruel system where government regulations inhibit hiring, and then government officials focus on unemployment benefits rather than moving out of the way and letting companies hire workers. I’ve written about how regulations are a stealth tax on employers, making the cost of employment more expensive than it should be — thus hurting employees. The SBA has estimated that the cost of regulation is approximately $10,000 per employee. This is before the brunt of the Obamacare regulations were felt by employers, including the so-called “employer mandate,” requiring employers to pay a tax if substandard (or no) insurance plan is offered by companies of a certain size.

Sucking up to $216 billion out of the economy to comply with regulations is going to prevent employers (particularly small employers) from hiring more.

Speaking of taxes, cutting taxes on job creators is a good way to free up income to hire people. Of course, without increased demand, businesses don’t have a real reason or incentive to hire. As the economy continues to improve, a tax cut could help in this regard. More on this another day.

3. Extending unemployment insurance benefits does more harm to the long-term unemployed.

It seems counter-intuitive, but many argue that it’s really not, including Rand Paul. Unemployment insurance pays a percentage of the wage at your last job, but can still be more than the federal minimum wage and most state minimum wages (assuming a 40 hour work week, it comes to about $10 per hour in New York, but can be as high as $16 per hour in Massachusetts). Why would someone take a minimum wage job when the government will pay that much (or more) to them while not working? Of course, on the other hand, it’s understandable that someone who plans to “only” be unemployed for a short period of time would not want to bother looking for a minimum wage job for numerous reasons. The problem with this is that the assumption is that the individual will be employed in his or her normal area of work before unemployment benefits run out. For many of those who lost their job during the Great Recession, this was not necessarily the case.

Thus, those who were newly unemployed continue to be unemployed for a longer period of time and receive a continued benefit. Employers, we are told, are not interested in hiring folks who have been unemployed for a long period of time. Nobody plans on being unemployed for a long period of time (or at all, most likely).

4. The extension of unemployment benefits is expensive.

The cost of extending unemployment benefits for another year is projected to be over $26 billion according to the CBO. This money is not coming from an extra tax on employers or anyone else, so in order to fund this, the government needs to borrow the money. The projected amount of money coming in for unemployment insurance in the President’s FY 2014 budget is $60 billion. Essentially, we are talking about spending almost 50% more than what the federal government is receiving for the purpose of unemployment. While $26 billion may be a “drop in the bucket” when the government is projected to spend over $3.6 trillion in 2014, the money has to come from somewhere. Considering how the President shut down parks during the government shutdown and cancelled Fleet Week due to the sequester, I find it amusing that the Administration is willy-nilly ready to spend billions on a failing program such as unemployment insurance.

5. The idea that unemployment insurance benefits stimulate the economy is ludicrous.

Many economic wonks and whiz-kids such as Nancy Pelosi have argued that unemployment benefits stimulate the economy, therefore we should expand them (or certainly not cut them). Whenever the topic du jour is unemployment, the left trots out economists who argue that not continuing extended unemployment benefits creates a drag on the economy of anywhere from $600 million to $1 billion per week. Of course, just like the living wage advocates, this line of thinking assumes that the debt load and cost of extending unemployment benefits has no cost, such as debt and interest on the amount borrowed. Also, they fail to acknowledge that an employed worker generates more economic activity than someone receiving a handout. The employed worker needs to travel to work, make purchases related to work, and receives a paycheck where they pay taxes. The employer also needs to pay taxes and is able to meet increased demand, generating more economic activity.

If extended unemployment benefits generate positive economic activity with no side-effects, then why don’t we triple or quadruple it? Just like making the minimum wage $100/hour, the economics of the positive economic benefit of extended unemployment benefits is pseudo-economics.

There’s some late talk about Boehner being “open” to extending unemployment benefits. I think that this is being leaked to try to cause the House GOP to make an unforced error in this regard. The Senate is a tough place for such legislation to pass, but if Boehner ruled it out, it wouldn’t force the Senate to state their positions on the extension. Rather than putting the House in the spotlight, Boehner is (in my view) forcing the Senate to act first. Rand Paul said that he was potentially open to an extension that was paid for, which is an interesting twist and puts the Democrats (particularly the Senate Democrats) on the defensive. Watch for Harry Reid talking about “a clean unemployment benefits extension” bill.

If Congress really wants to reduce unemployment, they should reduce regulations or cut taxes.

As always, free markets are better markets.

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This week, we can look forward to earnings season starting, with Alcoa reporting on January 9th. Initial unemployment claims are due on the same day (expected at 331k) and on Friday, we will have the BLS report on the December employment situation. The consensus is 200k jobs and a 7.0% unemployment rate, but some are predicting a drop to 6.9% in the U3 rate. We will see!

Have a great week!