Business & Economics

Why a civil society extends unemployment benefits

Robert Reich

I have the questionable distinction of appearing on Larry Kudlow’s CNBC program several times a week, arguing with people whose positions under normal circumstances would get no serious attention, and defending policies I would have thought so clearly and obviously defensible they should need no justification. But we are living through strange times. The economy is so bad that the social fabric is coming undone, and what used to be merely weird economic theories have become debatable public policies.

On Monday it was Harvard Professor Robert Barro, who opined in today’s Wall Street Journal that America’s high rate of long-term unemployment is the consequence rather than the cause of today’s extended unemployment insurance benefits.

In theory, Barro is correct. If people who lose their jobs receive generous unemployment benefits they might stay unemployed longer than if they got nothing. But that’s hardly a reason to jettison unemployment benefits or turn our backs on millions of Americans who through no fault of their own remain jobless in the worst economy since the Great Depression.

Yet moral hazard lurks in every conservative brain. It’s also true that if we got rid of lifeguards and let more swimmers drown, fewer people would venture into the water. And if we got rid of fire departments and more houses burnt to the ground, fewer people would use stoves. A civil society is not based on the principle of tough love.

In point of fact, most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared. Indeed, fewer than 40 percent of the unemployed in most states are even eligible for benefits, because states require applicants have been in a full-time job longer than most jobless had one. A majority of the jobless typically have moved from job to job before they failed to find a new one, or have held a number of part-time jobs.

So it’s hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work.

Anyone who bothered to step into the real world would see the absurdity of Barro’s position. Right now, there are roughly five applicants for every job opening in America. If the job requires relatively few skills, hundreds of applicants line up for it. The Bureau of Labor Statistics says 15 percent of people without college degrees are jobless today; that’s not counting large numbers too discouraged even to look for work.

Barro argues the rate of unemployment in this Great Jobs Recession is comparable to what it was in the 1981-82 recession, but the rate of long-term unemployed then was nowhere as high as it is now. He concludes this is because unemployment benefits didn’t last nearly as long in 1981 and 82 as it they do now.

He fails to see — or disclose — that the 81-82 recession was far more benign than this one, and over far sooner. It was caused by Paul Volcker and the Fed yanking up interest rates to break the back of inflation — and overshooting. When they pulled interest rates down again, the economy shot back to life.

The Great Jobs Recession is far more severe. It’s continuing far longer. It was caused by the bursting of a giant housing bubble, abetted by the excesses of Wall Street. Home values are still 20 to 30 percent below where they were in 1997. The Fed is powerless because consumers cannot and will not buy enough to bring the economy back to life.

A record number of Americans is unemployed for a record length of time. This is a national tragedy. It is to the nation’s credit that many are receiving unemployment benefits. This is good not only for them and their families but also for the economy as a whole, because it allows them to spend and thereby keep others in jobs. That a noted professor would argue against this is obscene.

Cross posted from Robert Reich’s blog.

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Comments to "Why a civil society extends unemployment benefits":
    • Carl Williams

      Professor Reich:
      Your insight to relevance is awakening. Having to appear on the Kudlow show three times a week to plumb up their questionable diatribes and psychobabble market vocabulary must be embarrassing. You spoke of the social fabric starting to unravel.”Disturbing”Capitalism may be the economic wing of the evil empire, which doesn’t fit well with Republic style Democracy. The house of cards is trembling; time for a new dealer and shuffle.

      [Report abuse]

    • Carl Williams

      Scot B:
      I liked the grass analogy,yes no matter were you head in America today unemployment is staring you in the face also,the powerful players at the top won’t use the D word.The same players that brought down the mkt in 29,brought down the mkt 08 until regs are replaced,more of the same will continue.This country is at a cross roads restore ethics,morality,
      benevolence,Think of ways to increase the size of the middle class,green up your view of living in harmony with this very hard place to find.Planet Earth.evolve or devolve it is a choice.”Think”

      [Report abuse]

    • Carl Williams

      Bryan Byrne:
      Astute observation,well said.All of the aforementioned reasons for the decay of our way of life can,and should be blamed on the masters of the universe.Prier to the deregulations America was functioning on half potential,after the “Big swindle”we are operating in and economic
      no mans land!Facing social chaos.”The Big fix”Capitalism is a poor mate for the Republican style Democracy we presently embrace.I submit a change must be undertaken to make Capitalism more accountable,for creating the cyclical
      mkt bubbles that diminish middle class wealth.Informed Capitalism,must be implemented now!# one rule for new Capitalism,”DO NO HARM” or face imprisonment for the questionable deeds,of the “BIG SWINDLE” style Capitalism which is endemic Wall street practice now.

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    • Dave Thomas

      Wishing and hoping for results doesn’t change reality. Study after study has shown that unemployment benefits delay individuals from finding new work. Why work when you get paid not to.

      If you want to end unemployment cut the cost of hiring individuals by reducing taxes and the cost of benefits. We have a family business that needs more help, but we refuse to hire any employees and use temp agencies because hiring would open us up to endless regulation, taxes, and worst of all workers compensation insurance and liability. There is no way that a person can provide my company the benefits of their cost in the current environment, and Obamacare hasn’t even arrived yet.

      Wishing things were different is a poor substitute for dealing with the way the world works, and perpetuating this fallacy is the worst intellectual endeavor of all.

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    • Bryan Byrne

      Unemployment insurance in a civil society is not about being nice or kind. It is about mitigating the social costs of dislocation among the workforce.

      The argument that unemployment insurance causes unemployment is not exactly right. It may extend (but is not the ultimate cause of) unemployment marginally for a couple of weeks as people more calmly and rationally find options. Somebody should test the general productivity of workers who find work under lack of unemployment insurance vs. under unemployment insurance. I bet that those who had unemployment insurance are more effective co-workers.

      I would have thought the more powerful argument would have been the social transaction costs of wide spread wealth loss, poverty and misery. Individuals and families that lose their capacity to generate sufficient income fracture. Rates of substance abuse, domestic violence, destruction of housing and business assets also increase short and long term public expenditures in health care, justice (cops and jailers), child protection, etc. These problems are not confined to the individuals and the public servants; neighbors, school children, and the elderly suffer worse living conditions. Our ability to educate declines. Human and social capital deteriorates fairly rapidly as general unemployment becomes structural unemployment.

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    • Scot B.

      @Anonymous: You’re assuming they choose to be in some untenable situation. Even if they’re willing to move – where can they go where things are better? If they’re willing to take a class – can they afford it? And what class will turned a skilled carpenter into an IT pro before next month’s jobless numbers come out?

      This is a countrywide recession and not everybody can jump from one county to another or one state to another and find a job waiting for them. The grass is dying on both sides of the fence.

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    • WilliamS

      Really who could possibly live on unemployment for more then a few weeks, unless they are living under someone else’s roof, especially if they have a family. To maintain the most basic shelter and ingest a minimal amount nourishment would cost more then any allowed weekly benefit.

      The many unemployed and underemployed college educated young adults would chose any kind of work over living with their parents or living like paupers.

      And, the mature worker who watched all their savings disappear along with their jobs, also would be happier employed rather then ‘living large’ on unemployment.

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    • Anonymous visiting scholar

      I’m torn about your rhetoric that we should not “turn our backs on millions of Americans who through no fault of their own remain jobless in the worst economy since the Great Depression.” Why is it not one’s own fault (or responsibility) that they choose to remain in a certain situation? I’ve been long-term unemployed and the benefits I received allowed me to defer making hard choices — but when the money ran out I chose to take a lesser paying job that was two hours away from home. The short-term money gave me time to transition and plan. As I see it, unemployment benefits are an insurance policy we pay into. It has a finite pool of money in which to pay out claims if it is to be self-sustaining. But how long is too long?

      [Report abuse]

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