Congress has now passed another extension of the period over which the unemployed may collect unemployment compensation for the state and federal governments.
Besides the taxpayer cost of extending this period, little attention is being given to the fact that by subsidizing people’s unemployment you create the incentive for them to be unemployed even longer.
I discusss this dilimma in a new piece called “Now Bigger Bailout for the Unemployed” that may be found on the AIER website.
{ 34 comments }
Gosh, I wonder how they’ll pay for all these new entitlements?
Oh, I know.
US seeks to borrow 300 billion from Gulf states
You’ve heard of loansharking? This is called “borrowsharking”.
As the Petit Guignol prepares to leave the stage and the Grand Guignol prepares to take the stage, I am about to go to the Mises store and purchase my copy of Henry Hazlitt’s “Man vs. the Welfare State.”
And you also have the diversion of capital issue as well. Bailing out individuals is the same as bailing out companies. The government takes capital resources away from investors and businesses and uses them as it sees fit. So you have less capital to use to fund the new projects that will create the jobs to get us out of this mess.
” … by subsidizing people’s unemployment you create the incentive for them to be unemployed even longer.”
Unfortunately, that is the Federal Reserve’s actual goal, in an effort to “fight inflation.”
These are more of the ‘Depression era’ disincentives that will prolong the economic malaise.
You do know, I hope, that a considerable percentage of those who find themselves unemployed (in the US) cannot avail themselves of unemployment benefits.
You also know that the unemployment figures given by the US Govt ignore anyone who has given up on finding work … and that that number is estimated to be more than a million.
Sure, for a insignificantly small number of people, there will be an incentive to refuse offers of work. But in a situation where nearly 10% of the workforce is unemployed …
All I can say is I’m guessing is that you are rich and that you don’t give a damn (about liberty or anything else) as long as you remain so.
Oh, so you’re saying that we need to make the unemployment benefits more comprehensive because not everyone who needs them is getting them! Why, *that* is probably why these policies never work, it’s because they’re never run properly! Sheeze, when can we get some bureaucrats who can actually do things right?!
“Sure, for a insignificantly small number of people, there will be an incentive to refuse offers of work. But in a situation where nearly 10% of the workforce is unemployed …”
Pray continue your argument, because so far it isn’t making sense to me. All I can see is that when nearly 10% of the working force is unemployed, it gets more expensive to support them, thus increasing the burden on those who are employed. Unemployment benefits are diverting real resources that could be used productively – likely creating productive jobs for those who are unemployed – to unproductive consumption by the latter. They are creating a “minimum wage” – why work for less than your unemployment benefit? – which prevents productive jobs from coming into existence.
I think it’s best to ignore your emotionally-based assumption that we are all Scrooges who don’t want to “altruistically” pay more taxes to help those who rightly deserve it. There’s nothing noble about spending other people’s money in charity. And you are phenomenally wrong to assume that all those unemployed people are poor wretches who will die of starvation if the government doesn’t heroically step in to aid them. You ever heard of private charity? Family? Friends? Savings? Well, probably not the latter. But they help, you know… and no bureaucrats to grab a piece of it in transit.
Freude Bud,
subsidizing unemployment will only further increase the incentive to become and remain unemployed. By reducing the marginal cost of unemployment, the state increases the demand for unemployment. It has nothing to do with Marxian class conflict, and everything to do with fundamental economics applied to a particular state intervention. If you wish to see greater employment and economic recovery, we should entreat the state to stop its counter cyclical policies and Keynesian bungling in the labor market. Allowing the market to determine the important macro aspects of the economy and reducing the restrictions and disincentives on labor will allow for a much smoother and less turbulent recovery.
There is a gap in the reasoning. Unemployment benefits only “subsidise unemployment” where the beneficiary has employment options that are only marginally worth taking up, which make him prefer the benefits. But when benefits are set at bare survival – as they are – the options crowded out offer less than that and aren’t worth taking up anyway. Half a loaf is not better than no bread when what counts is enough bread and that is greater than half a loaf. And regardless of levels, the benefits never subsidise unemployment at all at the other end of the employment transaction, i.e. they don’t influence employers’ hire and fire decisions.
So unemployment benefits don’t subsidise unemployment until they are set higher than survival levels. No, the actual damage done by unemployment benefits is from the drain of funding them.
I was laid off almost exactly a year ago (financial advisor). I used the unemployment benefits as a boost to my savings for three months while I drove all over four states interviewing for various jobs (which is expensive). Once they ran out I swung a hammer for three months fully enjoying myself as a productive citizen again while waiting for my new job to begin.
So in my case unemployment benefits were nice as it allowed my savings to last much longer. Thankfully I only had a house payment to make as I was debt free in all other regards, Otherwise I would have been forced to work two jobs and possibly ask my wife to do the same. Which would not have allowed me to travel as extensively as I did applying for jobs.
Unemployment benefits can be useful if the person receiving them is using them while actively looking for another job.
to pm lawrence:
define “survival levels”. without using value judgements, please.
Anony said: “” … by subsidizing people’s unemployment you create the incentive for them to be unemployed even longer.”
Unfortunately, that is the Federal Reserves actual goal, in an effort to “fight inflation.”"
I agree with the author that we shouldn’t create more incentives for people to be unemployed. But I must disagree with the anonymous commentator. The Federal Reserve has no intentions to combat inflation – they love inflation. Actions speak louder than words.
They give bailouts so that the lowest class – the ones without a job and hurting – don’t pick up pitchforks and try and rebel. The Middle Class that remains is comfortable enough they would never bother to rebel against the system. The system is at fault. It is a system with a fake currency that is easily manipulated and taxed – and controlled by a few – while still giving some handouts to the very poorest to stop any such rebellions. Would we be in this economic mess if they hadn’t changed the system on us? What if we had followed the Austrian model instead of a socialistic one (where power remains in the hands of a few)?
Don’t be silly, Newson, it’s self explanatory; res ipsa loquitur. Sufficient for survival, but no more (in particular, not enough for longer term “necessities” that can be deferred). What that level is will of course depend on outside circumstances, and you are better able to assess it for the situations you may be thinking of than I could.
(Quoting) “What that level is will of course depend on outside circumstances, and you are better able to assess it for the situations you may be thinking of than I could.”
Ah, so it *is* subjective. You’re right that people are better able to assess the meaning of “basic survival” on the personal level, which is only one of the reasons why private charity is more desirable than government bailouts – and that’s only from an utilitarian point of view.
Trying to gauge how much the benefits stimulate unemployment is an unproductive discussion, better fit for a “macroeconomics” textbook than an Austrian economics blog. It’s enough to know that unemployment subsidies are unproductive, a burden on those who are employed, unethical, and unConstitutional.
There probably is a lot more unemployment then that.
I was talking with someone who is sort of retired. His house is paid for and he has savings. He’s looking at doing some work, perhaps part time. However he’s concerned about taxes: between social security and income taxes (fed/state) he’d be close to a 50% tax bracket .
Since he already has income from his savings, the “job” income would start at a high bracket, not zero.
And he would have to give up a lot of time…
So far he’s unemployed.
George,
excellent observation. In addition, all unemployment benefits encourage participation in the black market and in jobs where payment in cash is possible. This is because by mandating that unemployment benefits go to those who are not employed in a state sanctioned and monitored job, there is incentive to get a non-state sanctioned job to supplement the income from the program. All levels of unemployment benefits have this perverse incentive. Note that I have no problem with either black market (as long as the transaction does not violate property rights), nor with people being payed in cash. This is just one more reason why the state can not effectively administer welfare.
I’ve been unemployed twice in my career of 15 years–both times because I was working for small companies that had started to tank and had to shed workers fast. Both times I collected unemployment benefits. While I don’t see these benefits as a persistent disincentive, I have to admit that it did slow down my search for new work. I wasn’t as “hungry” to get new work. But because I knew the benefits would run out, I knew I had to ultimately get work.
Now, I was a thrifty fellow living with roommates. For me the benefits covered my costs to the break even point. Had I had a family and a mortgage, I doubt the money would have covered enough of my budget to take away my worries. So, I think it’s important to recognize that this “benefit” is going to be perceived differently by people in different situations.
My suggestion would be–if the benefits are going to be extended, then they should at least be reduced or gradually reduced. That way the appetite of young, able bodied workers will increase more rapidly and they’ll try to get themselves back into the workforce.
College Parasite writes “Ah, so it [survival level] *is* subjective”.
No, nonsense. Rather, only someone in a position to assess the facts can determine that. I am in Australia, and I could tell you what it is here – but I cannot tell you what (say) the USA level would be.
to pm lawrence:
so you’re recommending a policy prescription whose specifics are “self-explanatory”?
i’m in australia, too, so indulge me, tell me what a survival income is.
No, Newson, I’m not ‘recommending a policy prescription whose specifics are “self-explanatory”‘, I’m just answering your question, as far as I am able, in relation to one of the parameters of a policy which is widely found around the world. As it happens, the policy I favour is the one I described in other posts, the Kim Swales approach used transitionally to phase out government dependency once people had private resources. (It’s a bit like Distributism.)
As for your supplementary question just there, it’s intellectually dishonest. I am going to answer it, so that nobody can turn round and say I wouldn’t or couldn’t, but before I do I am going to point out what people could turn round and accuse me of if I do. They could argue about the levels and claim that shows it’s not self-evident (and outside observers wouldn’t know any better than to believe that there’s a real open issue). I might make a silly mistake about the detailed numbers, and people would claim my earlier remarks were disproved when it only showed I made one silly mistake later on. And they could make out that the mere fact that the question was asked and answered showed that I conceded that it needed to be answered and couldn’t be figured out by somebody on the spot. All that is improper.
So, without prejudice, and in the full knowledge that you can figure all this out for yourself:-
- Broadly, survival needs are food (including drink), clothing and shelter. Longer term things like education and health care are necessary for the maintenance of the species, but aren’t immediately relevant.
- Even clothing isn’t a short term need, supposing people start out with some (I neglect cases of shipwreck survivors etc.).
- That leaves food and shelter.
In metropolitan Melbourne it would be hard for someone to find rental accommodation for one person for less than A$1,000 per calendar month; exceptions generally indicate luck and/or rents that haven’t shifted in recent years, and cannot be relied upon for the future.
- Food, not counting access to supplies from charities, relatives etc. (a similar unreliable exception) might cost A$4 per day.
Rents would be much lower in rural areas; as against that, food costs in remote areas might be higher. You should adjust the above figures in the light of local circumstances known to you – which is what I said you could and should, so I am not conceding any point about the question being a material one.
Of course, none of the above allows for people with their own private resources like vegetable gardens or chickens or whatever. As I measure those things, they are actually non-cash subsistence activities, a form of employment, and no more a test of the resources available to others than is the existence of people in employed cash work.
to pm lawrence:
your post shows what an impossible task it is formulate coherent national policy around some fuzzy concept of survival income.
every reality is different and subjective, i might eat mung beans and live with ten others in in tasmania, and so the dole may well be a viable lifestyle choice.
in any case, real world experience is that many use the dole as a convenient supplement to another black income. many of the fabric outworkers do piece-work for miserable cash payments, but can do ok thanks to the unemployment subsidy.
anyway, you still are running into bastiat’s window, the tax burden will be reflected ultimately in higher cost of living. check mate.
Oh, Newson, didn’t you even bother to read what I wrote? I wrote “So unemployment benefits don’t subsidise unemployment until they are set higher than survival levels. No, the actual damage done by unemployment benefits is from the drain of funding them.”
Far from your “anyway, you still are running into bastiat’s window, the tax burden will be reflected ultimately in higher cost of living” checkmating my position, it endorses it. You have just endorsed what I said was the real avenue of harm.
Your “every reality is different and subjective, i might eat mung beans and live with ten others in in tasmania, and so the dole may well be a viable lifestyle choice” is also skating over what I put about access to other resources; that option is only open to those who can get such a group together and have a cheap source of mung beans – and if they grow their own, well, I already covered that sort of thing. You’re getting somewhat “let them eat cake”, just there.
As for “in any case, real world experience is that many use the dole as a convenient supplement to another black income. many of the fabric outworkers do piece-work for miserable cash payments, but can do ok thanks to the unemployment subsidy”, look closer at what you just wrote. Not only is it a case of people having access to other resources, it is also a case of things working as an employment subsidy – and it probably falls in the range I called a sweet spot of net gain, that I described in the recent Negative Income Tax post.
Now, readers, looking back at all that, do you see why I thought Newson’s question was intellectually dishonest for opening the door to that sort of guff?
to pm lawrence:
yes, let them eat cake, their cake, and not the cake of others.
“guff” is the socialist idea that redistribution can, by virtue of some clever policy tweaking, ever avoid causing diminished general welfare.
there is no “sweet spot”, no magic formula, and this should be clear to any attentive frequenter of this site.
Newson, are you bothering to follow that stuff up, or even what I already wrote here?
“yes, let them eat cake, their cake, and not the cake of others” would be a bloody good idea, but there are two things wrong with it:-
- as things now are, a lot of people do not have their own private resources (see my earlier comments above); and
- in large part, possibly entirely, that lack of private resources is a consequence of the cumulative effects of past government actions, so “the cake of others” is hard to sort out from their own cake, previously moved away from them.
When you write ‘there is no “sweet spot”, no magic formula, and this should be clear to any attentive frequenter of this site’, that is an assertion of faith on your part, and furthermore at odds with your own remarks about people piggybacking into work on the back of unemployment benefits. Have you actually checked out any of what I described?
I’ll make it easy for you, by giving a link to the Kim Swales approach right here – though you really ought to go and look at the recent Negative Income Tax post, where I talk through the whole sweet spot thing. His work indicates that a virtual employment subsidy, implemented with tax breaks to employers on GST/VAT, would both raise employment levels and increase GDP (about half as much, as a percentage), for a wide range of parameters. I have looked into the area separately and independently, in articles which can be found on my publications page; basically, games theory shows that that scheme is budget neutral to the government and provides an incentive to hire – and the output of that additional employment has no additional cost (as compared with the standing cost of unemployment benefits). It’s all about undoing previous harm.
Now, you are welcome to look at that and find grounds for disagreeing, but it is plain wrong to act out “my mind is made up, do not confuse me with the facts”. Don’t just work up emotion, go and look and then come back with an informed response.
to pm lawrence:
here’s the bit that you seem to be missing, which happens to be cited in the kim swales wikipedia entry:
“Perhaps the biggest problem with the Pigovian tax is the “knowledge problem” suggested on page 6 of Pigou’s essay “Some Aspects of the Welfare State” (1954) where he writes, “It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of [the gaps between private and public costs] could interfere with individual choice.” In other words, the economist’s blackboard “model” assumes knowledge we don’t possess — it’s a model with assumed “givens” which are in fact not given to anyone. Indeed, this is knowledge which could not be provided as a “given” by any “method” yet discovered, due to insuperable cognitive limits theorized by economists like Friedrich Hayek and researchers in the various fields of nonlinear dynamics.”
as for whether there can be any theoretical benefit to gdp (your faith-based assertion against mine), so what? gdp is a flawed keynesian metric.
“college parasite” is right, your line of thinking reminds me of the current crop of economists, busily trying to fit humans into their mathematical models. not very austrian.
as far as the shortcomings of game theory, you know the austrian arguments and obviously disagree. here’s a couple of pieces by murphy.
http://mises.org/daily/937
http://mises.org/daily/1404
Newson, I have submitted a full and complete answer, but unfortunately it’s big enough that “Your comment has been received and held for approval by the blog owner”. Comments that get that usually get rejected unless they are pushing the party line, so I’ll wait a day or two to see what happens. If it doesn’t get through I’ll try to break it into parts and submit those.
far be it for me to speak for mises.org, but i imagine it’s more a software thing (spam filter). it’s too flattering to imagine our natterings are the subject of intense scrutiny from above.
No, I wasn’t talking about what triggered the initial block but about the “held for approval by the blog owner” part. Sure, software triggers it – but then a human censor never releases it unless it suits him. You may recall this happening to a comment in an earlier dialogue, which Kevin Carson kindly hosted after the Mises lot never released it.
First half of reply.
Ah, some meat.
Newson writes ‘here’s the bit that you seem to be missing, which happens to be cited [linked, actually] in the kim swales wikipedia entry… In other words, the economist’s blackboard “model” assumes knowledge we don’t possess – it’s a model with assumed “givens” which are in fact not given to anyone. Indeed, this is knowledge which could not be provided as a “given” by any “method” yet discovered, due to insuperable cognitive limits theorized by economists like Friedrich Hayek and researchers in the various fields of nonlinear dynamics’.
There are sound things there that need to be addressed, but there’s a fundamental misconception.
Pigovian subsidies (of which this is one) do indeed come from a body of theory that does not itself tell you the optimal levels. However, that does not mean you cannot work them out, whether empirically or through different theory, and even when you cannot get the precise optimal level, that does not mean that one way or another you cannot find a level which is an improvement. In a sense, refusing to choose an improvement when you cannot find a rationale for a level is settling for a value of zero, equally without a rationale. (Surprisingly, levels which are a little off often don’t have very sub-optimal results, but that would take a lot of explaining – it has to do with the typical shapes of curves.)
Second half of reply.
But it so happens that you can find suitable levels for the Kim Swales approach. That is just precisely one of the things that his detailed modelling brought out. Furthermore, since the market imperfection here is one that was government created – the disconnect of unemployment benefits from their funding – there are already numbers for a level that would certainly be an improvement: the marginal cost of unemployment benefits for a typical unemployed person. That is, you could put the numbers together from published statistics. (When I did my work ten years ago, it was of the order of A$10,000 per person per year.)
“as for whether there can be any theoretical benefit to gdp (your faith-based assertion against mine), so what? gdp is a flawed keynesian metric”. Ah… no, what is going on here is heading off objections from people who do worry about GDP; it’s secondary, showing people who suppose that there must be an additional cost somewhere that that isn’t so. The thing that makes it worth doing is the improvement in employment, both from the point of view of people who are helped and from the point of view of people who fund them when they aren’t helped.
‘”college parasite” is right, your line of thinking reminds me of the current crop of economists, busily trying to fit humans into their mathematical models. not very austrian.’ That is why you should look closer, because that is just your imagination talking (apart from the “Austrian” bit – I’ll take things of value from wherever they turn up, not simply from an approved source, and use apparent inconsistencies as clues for things that need a closer look to work out what’s really going on). I’m not trying to fit people into models (though I feel many doctrinaire Austrians at least come off sounding that way!). The value of models that don’t fit is that they highlight areas that need a closer look – particularly when they mostly fit, so the anomalies tell you more than a nonsense theory would. For instance, for “here’s a couple of pieces by murphy…”, he’s not treating games theory this way or allowing for the times when it does fit. That leads on to “as far as the shortcomings of game theory, you know the austrian arguments and obviously disagree”. Rather, I see it as incomplete, but perfectly capable of helping as, when and if it’s the right tool for the job (which it was, for my own analysis).
This has moved away from the original topic. Can I take it that the question of whether unemployment benefits at typical levels are an unemployment subsidy has now been settled, in the negative?
to pm lawrence:
i have read your posts, and notwithstanding the effort you’ve invested, you’ve not put a scratch on ebeling’s hypothesis, which was:
“If you extend that amount of time that those who have lost their jobs can collect unemployment compensation at the taxpayers’ expense, don’t be surprised if they delay looking for work.”
whilst i don’t believe everything i read on this site in a dogmatic fashion, i do subscribe to the austrian view that economics is not a science that lends itself to mathematization, so the mere fact you can produce a set of beautiful curves leaves me cold.
the presence of the state does distort resource allocation, and indeed some people are without cake, so to speak, but can and do access others’ resources through the job market (informal or formal).
you assert:
“Half a loaf is not better than no bread when what counts is enough bread and that is greater than half a loaf.”
this is merely your personal point of view. in other words, no more valid than my behavioural observation, which is: a starving man eats anything as a first priority. he doesn’t stop to argue about whether the portion is big enough. there’s plenty of time for arguing after eating, and a half-full stomach allows for more vigorous arguing. others can judge which behaviour is more credible.
i suppose a simple example of where your logic falls flat is the australian dole scheme. there’s a requirement that jobseekers accept the first job offered where the applicant has suitable skills (within travelling distance of 1 1/2 hours). failure to do so sees the dole suspended. if there weren’t a tendency for the dole-recipient to be a little picky whilst holding out for a better opportunity, this condition wouldn’t be necessary. the code anticipates the “ebeling delay”.
Newson writes ‘i have read your posts, and notwithstanding the effort you’ve invested, you’ve not put a scratch on ebeling’s hypothesis, which was: “If you extend that amount of time that those who have lost their jobs can collect unemployment compensation at the taxpayers’ expense, don’t be surprised if they delay looking for work.”‘
How do you get to that? The point I made was that you only get that if the benefits are better than the work, but that’s not what’s being described. He’s only talking about extending their duration, not raising their level. I’ll recap further down. By all means point out flaws, but it really isn’t helpful just to say “there are flaws” without pointing out what they are.
‘you assert: “Half a loaf is not better than no bread when what counts is enough bread and that is greater than half a loaf.” this is merely your personal point of view.’
No, it is not. I was very carefully describing a situation of physical need, when taking the half loaf stopped any chance of a whole loaf and anything less than a whole loaf would not be enough. So…
‘in other words, no more valid than my behavioural observation, which is: a starving man eats anything as a first priority. he doesn’t stop to argue about whether the portion is big enough. there’s plenty of time for arguing after eating, and a half-full stomach allows for more vigorous arguing.’
Absolutely correct, as a description of desperation. But, in that scenario, he gets full enough to argue – and argue and argue – and then starves. Only the man who goes for the whole loaf survives, if he is lucky. Or were you suggesting that people will settle for work they can’t live on if they are desperate enough to lose judgment? But that work isn’t there, because of minimum wages and such. (Yes, I suppose they would end up employed that way if that were not so – but not for very long, and they would switch to predatory activities if they could find them.)
‘i suppose a simple example of where your logic falls flat is the australian dole scheme. there’s a requirement that jobseekers accept the first job offered where the applicant has suitable skills (within travelling distance of 1 1/2 hours). failure to do so sees the dole suspended. if there weren’t a tendency for the dole-recipient to be a little picky whilst holding out for a better opportunity, this condition wouldn’t be necessary. the code anticipates the “ebeling delay”.’
But that “little picky” is the difference between life and death. Yes, even so you would be right – if non-survival work for the desperate were possible. But the floor has come up to meet the ceiling. Non-survival work isn’t there. Your statement about pickiness would only start to matter if people had more resources than barely survivable work would give them. Which takes us back to what I favour, virtually subsidising people into employment through tax breaks that don’t have funding or cash flow problems.
I have been paying into unemployment “insurance” for decades under coercion. Do I feel the least bit guilty for partially depending on the small fraction of my normal income that UI provides? Not in the slightest. This pieces misses that UI merely gives back a tiny fraction of the vast amount that has been stolen from us.
Really need tips from professional in auto insurane. It seems that a couple of individuals who have sent in their own data to one of the numerous “online auto insurance quotes” and already they’ve got solicitors all around them, emails, on the telephone, junk postal mail and also one case of Social Security Identity theft. Therefore my question is: Are these web based automobile insurance quotes really risk-free? Doesn’t it make sense to keep with a local automobile insurance agent that can be done business with both on the phone or in person.
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