Unemployment insurance extensions in the past five years have kept at least 600,000 people out of the labor force, because people tend to ride a gravy train. That’s the conclusion of analyses by the Federal Reserve Bank of San Francisco and the National Bureau of Economic Research, respectively. The evidence is clear: Another extension of unemployment insurance would do more harm than good.
Even the recently departed chairman of the White House Council of Economic Advisers, Alan Krueger, once understood the perverse incentives at play. Before working for the Obama administration, two of Krueger’s own analyses revealed that paying people not to work actually increases the incentive not to work. And that means more time spent unemployed.
Perverse incentives impact states, as well. Extended unemployment benefits are disproportionately transferred to high-unionization, high-unemployment states such as California, Michigan, Illinois, New York and Massachusetts. And that amounts to political cronyism. Politicians in those heavily Democratic states could be pals of the current administration, but those states have a record of failure in putting people to work.
Nor is unemployment insurance doing any favors for the federal deficit. Under current law, the states are supposed to pay back the federal treasury $38 billion for emergency unemployment insurance benefits paid out.
A year’s extension would add $25 billion to the tab, or about $6.25 billion for three months. That money is not in the budget, and none of the options for getting it is pain-free.
When unemployment is persistently high, and there aren’t enough jobs available, the last thing we should do is continue policies that aren’t working.
So, what can we do that will actually generate economic growth and get people back to work?
We should cut governmental red tape, such as clearing the way to build the shovel-ready Keystone XL pipeline, repealing the ill-conceived and age-old Davis-Bacon wage rates, and revoking the Volcker Rule that hamstrings our financial institutions.
The American people deserve more than a handout from lawmakers and taxpayers. People deserve policies that foster innovation and opportunity.
EDITOR’S NOTE: This column was originally published in USA Today, January 5th, 2013