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  • White House's New Top Economist: Unemployment Benefits Are Not Stimulus

    President Obama’s pick as chairman of the White House Council on Economic Advisors co-authored a paper that showed that extending unemployment benefits will likely exacerbate joblessness. The paper’s findings run counter to the president’s economic argument for an unemployment benefit extension, which is expected to be a major part of the jobs plan he will unveil early next month.

    Princeton University economist Alan Krueger, who will replace Austan Goolsbee as the White House’s chief economic advisor, “is likely to provide a voice inside the administration for more-aggressive government action to bring down unemployment and, particularly, to address long-term joblessness,” according to a report in the Wall Street Journal.

    But will Krueger’s recommendations jive with the president’s apparent economic and political agenda? Krueger co-authored a paper for the Handbook of Public Economics in 2002 that seems to undercut the economic argument for extending unemployment benefits. The paper found that those benefits tend to increase the length of unemployment by discouraging the search for a new job, and may actually encourage layoffs. Conversely, the paper also found that unemployed persons who are ineligible for benefits search harder for a job and are therefore unemployed for less time.

    The president and his political allies have called for an unemployment benefit extension as a form of economic stimulus. Obama recently claimed that such an extension will “put money in people’s pockets and more customers in stores.” White House Press Secretary Jay Carney claimed that an extension of unemployment benefits could create up to a million jobs.

    Liberal economic theory holds that additional government handouts will stimulate consumer demand, create economic activity, and therefore lead to greater employment as businesses take in more revenue. While Krueger did not examine the direct effect of unemployment benefits on economic growth, the 2002 NBER paper did conclude that such benefits do not alleviate, and may very well exacerbate unemployment.

    “The empirical work on unemployment insurance (UI) and workers’ compensation (WC) insurance finds that the programs tend to increase the length of time employees spend out of work,” the abstract of Krueger’s paper states. The paper’s examination of others’ work on unemployment benefits finds that “the main labor supply effect of UI is to lengthen unemployment spells.”

    The paper also finds that increasing the length of unemployment benefits directly contributes to unemployment. “[I]ncreases in either the level or potential duration of benefits raise the value of being unemployed,” the paper states, “reducing search intensity and increasing the reservation wage.” More generous unemployment benefits, in other words, reduce the incentive to find employment. “Higher and longer duration UI benefits,” the paper adds,” will cause unemployed workers who receive UI to take longer to find a new job.”

    On the other hand, workers who are not eligible for unemployment benefits or who have approached or reached the maximum duration of benefits, are more likely to search for, and hence to find work. The study saw an increase in the “escape rate from unemployment for workers who currently do not qualify for benefits and for qualified workers close to when benefits are exhausted.” The study calls this the “entitlement effect.”

    Like other entitlements, it is meant as a “social safety net,” not an economic recovery policy. There may be humanitarian reasons to extend unemployment benefits (with corresponding budget offsets), but as a jobs program, by Krueger’s account, the policy will probably fall flat.

    Krueger’s paper focuses on economic incentives, and finds –perhaps unsurprisingly – that paying people for being out of work encourages employment in layoff-prone industries, and discourages the search for a new job once a worker is unemployed. It also tends to encourage employees to “work less hard on the current job,” the paper states, due to their knowledge that they will be eligible for unemployment benefits in the event of a layoff.

    The moral hazard and skewed incentives of unemployment benefits do not create a healthier economic climate – from the perspective of employment, at least – Krueger’s paper finds. But the president has already signaled both his intention to extend unemployment benefits and his belief that they will, in fact, stimulate the struggling economy.

    Will the president heed the findings of his newest chief economic advisor – who, for what it’s worth, supports the liberal political position on other high-profile issues – or stick to a dogmatically liberal approach in the face of Krueger’s own academic work?

     

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    16 Responses to White House's New Top Economist: Unemployment Benefits Are Not Stimulus

    1. Bobbie says:

      is he working pro bono?

      also certainty and regulation reduction so businesses can hire!

    2. Ray says:

      The people who have exhausted all benefits and still cant find work. What are they suppose to do???? Maybe the republicans should produce a bill that would help create jobs!! The haven't produce a jobs bill in the last 8 months!!

      • KJD says:

        Yeah…and when the Dems owned the House, Senate and Presidency and could have passed any damn thing they didn't either. They focused on bloated regulations with Obamacare and passing an almost $900 billion stimulus bill with only $36 billion going to "infrastructure" projects. The rest went to the States and thus the unions. Before sh*tting on the Repubs, ask yourself who had the bets opportunity to tackle this issue back in 2009. Also, the Repubs only control 1 part of Congresss and have a veto ready President in hand. It isn't the Republicans that need to take charge, it is Obama.

      • Dave says:

        There are jobs.. they may not be what they want but they can find work.. people want vs people need…

        Two years of checks is long enough!!!

    3. Soapy Johnson says:

      It's bleak out there. How bad? The Chinese now using fortune cookies to further discourage Americans in these tough economic times … http://placeitonluckydan.com/2011/07/recession-fo

    4. DEE says:

      They are the long-term unemployed, and some call them the elephants in the economic recovery room: They aren't going to go away simply by trying to ignore them.
      Yet for most of the recession and subsequent "jobless" recovery, that is exactly what many in Congress and statehouses across the country have done.
      Yes, benefits have been extended, in some states reaching 99 weeks through a combination and state and federal insurance (the limit in Arizona is 79 weeks, with a maximum of $240 a week).
      But now, with more than 5 million people out of work more than a year and nearly 2 million of those having exhausted all jobless benefits, a possible double-dip recession makes them impossible to overlook.
      Last Sunday, the Daily Sun put some faces on those statistics, and the pattern was telling: Many are in late middle-age and, contrary to some stereotypes, they have been persistently looking for work and even going through retraining. They have not simply taken the year off to pursue a hobby or travel.
      They have believed, as most of us do whether employed or not, that hard work in a job search will pay off and their lives eventually will improve.
      But for many, just the opposite has occurred. The longer they are out of work, the worse their situation becomes: financially, health-wise, and from an employability standpoint. Their self-esteem and even mental well-being are damaged. Studies show they engage in more self-destructive behaviors like substance abuse and suffer more personal bankruptcies and divorces.
      For those who attribute long-term joblessness simply to a failure of character, we urge a quick look at the history of the recession. From April 2008 to July 2009, the country shed more than 7 million jobs as the unemployment rate nearly doubled. Now, two years later and with the jobless rate still hovering around 9 percent, the recovery has added back just a million of those jobs.
      Do the arithmetic, and of course there is going to be a growing cadre of long-term joblessness until employers start doing a lot more rehiring.
      The official number from the Bureau of Labor Statistics is even more startling: The percentage of unemployed people who have been looking for jobs for more than six months is at 45.9 percent, the highest in at least six decades.
      And the scary part is that some economists and job counselors don't see that number going down even as a different sector of the unemployed – generally younger workers and new college graduates – manage to cycle back into the workforce more quickly.
      When the economy appears to be suffering a structural failure for an entire class of workers, it's time to rethink the basics.
      One approach is to change the way that companies are assessed for laying off workers and the way those ex-workers are paid. Some Washington think tanks are beginning to tout a variation of the German jobless "sharing" system. In that country as in the U.S., companies during the recession sharply reduced total payroll hours but spread them across more workers, who received smaller unemployment insurance benefits than if they were laid off.
      The effect is underemployment, but it also keeps employees connected to the workplace and virtually eliminates the cost of rehiring and retraining when the economy picks up again. California has allowed some companies to try it on a limited basis, and it might be worth expanding if a double-dip recession means less, not more, hiring.
      Another way to increase the labor force participation rate — the share of people older than 16 who are either working or actively seeking work — is through more public works programs such as the one at Fort Tuthill administered by the Coconino County Career Center, even if it is temporary. Right now, the national participation rate is just 64.2 percent, the lowest since 1985, and economists say the high living standards of a modern market economy cannot long be sustained when one-third of the population is not performing productive labor.
      The more immediate problem is how to talk seriously in policy circles about the elephant in the room when the focus in Washington is on budget deficit reduction. It is a noble goal to cut federal interest payments in half in 10 years. But what about the next two years, when, if trends hold up, the ranks of the long-term unemployed will have swelled by several million more?
      Work, whether we admit it or not, organizes our lives and gives us a purpose not equal to those of our families, but important to the community and the nation nevertheless. The long-term jobless are our neighbors and their need is immediate and, in some cases, dire. Putting them back to work can't be postponed much longer, and that will take a refocus of the economic recovery debate on jobs, not just the deficit.

      Read more: http://azdailysun.com/news/opinion/editorial/long

    5. janetredwine says:

      2002 is a long way from 2011. The entire economic climate has changed since then. If you think that people enjoy shopping at the 99 cent store for food that is really not very healthy you need a reality check. I say we need immediate job sharing. All full time empoloyees should be rewuiored to cut their hours in half and companies should be given huge tax incentives to initiate these programs. We have never had even 85% employment rate and there never has been enough jobs for everyone. Someone has to be delegated the role of the unemployed. Let us kick the dog while he is unable to walk. Not that most writers and proponents on no assistance for others all have very well paying jobs. They think we should lower the minimum wage for teens but their children don't work those jobs…get real…wake up…there never have been enough jobs for everyone and there will never be enough jobs to go around …ever. So what does this tell you and what can we do about it? Everyone should be working less hours and spend more time with their families and working on spiritual contemplation. The level of consciousness of the people of our country is equal to cavemen.

    6. lookagain says:

      Let's consider how the same dynamics could apply to the rich. With lower taxes, they don't have to work as hard to get a certain amount of money. When taxes are raised and they're not bringing home as much, they should be motivated to work harder to bring in income. Thus, raising taxes on the rich will improve our economy.
      We can look at history. Obviously in the '50's when taxes on the rich were very high, our economy was doing well. Now taxes are lower and the economy is much worse. Even so, many corporations have money but they're holding on to it, not investing it to produce more. If it were taxed at a higher rate, they might invest more of it in their businesses so they could earn more to make up for that increased tax.

      • Lily says:

        lookagain, the problem with your solution is that it's a bold one. We're not supposed to consider bold ideas, only tired retreads. Didn't you get the memo?

    7. Jeff, Illinois says:

      Yes, but I wonder what his views on unemployment benefits are in the present economic downturn . . It's not 2002 and we're not just in any old recession. I'm guessing he believes at present that any money allocated to such individuals puts more money into the economy . .

      • Bobbie says:

        Jeff, good point. this isn't "any old recession." this one is intentional by government design. Wouldn't focusing on "employment" be more productive then "unemployment" benefits? Desperate situations always puts more money into the economy. To have it within government's control and at government's convenience is one of the lowest blows to good hearted Americans in America's history. No tax payers dollars should go to someone's unemployment. that was the responsibility of the business and handled efficiently, within a practical time of reason.

        EMPLOYMENT is a stimulus to the economy!!!

        Government stolen tax payer money shouldn't even be allocated to natural disasters' effects! What the people can do as they always have at most levels, FEMA is trying to look essential but won't even budget to be able to carry out their exaggerated ratio of their claimed reasons for their existence. controlled crisis. To this government, "special interests" are higher priority to fund then the effects of natural disasters on lives involved??!! "special interests" and charitable benefits are not the role of government. and WHERE government can't budget within reason, is WHERE they're not essential! and WHERE the government refuses accountability to fraud and corruption within the roles of government, is again, WHERE they're not essential. People deserve respect and decency! WHAT this government DOESN'T provide!

    8. Robert Handy says:

      Obama, has brought"the Marxist dream" to fruitition! The "bankrupting of the American Nation," and the "destruction" of it's "democratic institutions" at the same time!

    9. SoCal says:

      @Ray, probably because the government is as efficient at producing jobs as it is in balancing its own budget. Lets see … Post Office – Fail, Amtrak – Fail, Fannie Freddie Medicare Medicaid – Epic massive fail; I can go on. Its not the government's role to create jobs. A term like "jobs bill" is about as stupid as a term like "shovel ready". However, perhaps if you add more exclamation marks behind your statements you might be taken more seriously!!!!!!!

      • Ray says:

        Yeah the republicans have a great plan for creating jobs….perhaps more tax breaks for corporations that have sitting on 2 trillion in cash. Demand is what create jobs not tax breaks for corporations.

    10. njguy says:

      There will never be enough jobs in this country if american companies insist on manufacturing their products overseas because of cheap labor . One incentive to manufacture goods here might be to increase the tax on these "imports" .Also seems like we have enough money to waste on pointless wars and aid to other countries – about time to cut that aid and use it for aid for the unemployed with job training required.

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