On Unemployment Benefits

With tomorrow's swearing in of Robert Byrd's replacement in the Senate, the Democrats will have enough votes to extend unemployment benefits to America's jobseekers. Republicans have held out on the measure, saying that they support the extension of unemployment benefits but that it must accompany a reduction in spending elsewhere. In this instance, I am fully on the side of the Republicans.

I support unemployment benefits because I think that they provide relief to those who need it most. According to The Economist, there are approximately 5 unemployed for every job opening. I think that statistic alone is pretty good support for the extension of unemployment benefits.

Unemployment benefits are not without cost, however. A traditional argument against unemployment benefits is that they create a disincentive for people to find jobs. While I am sure this occurs to some extent, I am not particularly convinced by this argument. I find it hard to believe that a substantial number of people would choose to live off of government unemployment when they have the option of working, both because of the psychological (dignity, self-worth, social stigma) and standard of living costs. In any case, I'd rather err on the side of trust in human decency.

However, there are other costs to consider. Whenever taxes are collected, a deadweight loss is incurred by the American public. Instead of incurring more (future) deadweight loss by increasing the deficit, I think spending should be cut elsewhere to pay for the program. This is not the only reason that the unemployment benefits should be offset by spending cuts. One of the primary justifications for the extension of unemployment benefits is that the unemployed are the most likely to spend their money and stimulate the economy. I agree that this is true. However, I argue that this effect will be dampened if the unemployment benefits are not offset by spending cuts.

If the unemployment benefits simply add to the growing federal deficit, then the benefits given to the unemployed are partly a loan that they will have to repay when their taxes go up in the future (the entire package that they receive isn't a loan because all taxpayers will have to pay it back, not just those with unemployment insurance). Knowing this, the only ones who will spend all of their unemployment benefits are those who would like to take out a loan on their own but cannot. The rest will simply save the part of their benefits for the inevitable future tax increase. I am admittedly making large assumptions about the economic and mathematical savvy of average people, but I believe I am right in principle and that what I've described will occur to some extent. Therefore, an offsetting spending cut will reduce the costs of unemployment benefits while making the program somewhat more effective. Unfortunately, it looks like the supermajority will stop me (and the Republicans) from getting my way.