Here I make two quick observations on the policies being discussed.
The first point has been widely noted, but it bears repeating since I keep hearing comments from people who seem to be unaware of it. When you hear that current unemployment benefits can in some cases be collected for up to 99 weeks, and that Congress is discussing an extension of this program, it is perhaps natural to think this means that some people might be eligible for longer than 99 weeks. But this is not the case. Instead what is being discussed is whether the current limits will be kept in place for another two years or whether the limits will be decreased immediately.
The second point to which I’d like to call attention has also been around awhile, but is appropriately still being discussed (e.g., Calculated Risk, Washington Post). The source appears to be these observations made by Wal-Mart CEO Bill Simon in September:
And you need not go further than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs, and continue to shop and mill about the store until midnight, when electronic– government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.
And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they’ve been waiting for it. Otherwise, we are open 24 hours — come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.
One thing you might take away from such accounts is that the spending multiplier out of compensation for the unemployed is pretty high.
But this story makes it hard for me to say no to the folks waiting in line at midnight for other reasons.
Jim-
I think he is talking about welfare benefits, not necessarily unemployment benefits. I think unemployment benefits are paid by check or direct deposit.
Unemployment benefits are most commonly paid by direct deposit. Those who do not have checking accounts get debit cards. Many states (if not most-I’m not sure), will mail you debit cards for you to activate by default if you don’t get your checking account set up with them for direct deposit. I would be surprised if any state still mails printed checks.
This is one of those tricky issues where you clearly sympathize with the unemployed and want them to have a lot of benefits. But of course the concern is that this puts the wrong incentive in place.
Given the slow recovery from this recession it’s probably pretty hard for a lot of these people to find jobs. So I completely agree with you that the short-run policy should be to extend the benefits. But I think the long-term solution needs to be worked out where the incentives are aligned correctly.
Rich Berger,
Indeed. Both programs help the needy and both have pretty good Keynesian multiplier properties.
But UI creates incentives to stay unemployed, while welfare creates incentives to stay unmarried and have babies. Big difference.
And yes, I personally know capable, educated people who stayed unemployed 99 weeks to milk the system.
It’s not as if you can’t help people without creating such perverse incentives. FDR did it better with the CCC and other programs by requiring work for handouts. And welfare could be in-kind and conditional upon birth control and participation in work or training or some other marginal contribution to society.
“One thing you might take away from such accounts is that the spending multiplier out of compensation for the unemployed is pretty high.”
This is the line that many high ranking politicians in Washington have been touting for the last several months, including Speaker Pelosi, and even President Obama. The multiplier of unemployment benefits is high, and thus creates jobs.
If this is true, why not make *everybody* unemployed? Why not go for 100% unemployment? If unemployment benefits work magic, let us go all the way then.
I find it astounding that no serious economist of any serious caliber of any serious university has come out challenging this idiotic statement from politicians.
Long-term solution-cutting benefits off after a certain amount of time?
Yea Manfred,
Those demand side economic views are pretty stupid. Every small business I go to has a line of customers out the door and down the street. I asked the owners “what’s up?” and they say as soon as they get a tax break to hire more help they will start filling customer orders. So I guess all us middle/lower class people have to sit on our stockpile of money waiting for business to get a tax break so we can spend.
@ Varones — right now the empirical evidence suggests minimal negative incentives from increased unemployment benefits because there are not enough jobs out there.
I’ve been out of work twice in my career. The first time had a U-3 rate of less than 5.0%. That time, finding a good job took me nine weeks (two of which was because a major decision maker was recovering from surgery). This time around I’m at 13 months of significant underemployment despite 300+ resumes, 15 interviews and one almost offer that is in limbo right now.
Situations matter much more than your simplistic incentive analysis suggests. Also your history needs to improve as welfare reform in 1996 significantly changed the incentive structure so that work was much more highly valued.
Manfred, I am so happy for you and your comfortable lifestyle. I’m sure you’ve earned it, unlike those greedy Wal-Mart shoppers. To answer your question, “why not make everybody unemployed,” it is because it is not an advantageous situation for most people to have to stand in line at Wal-Mart at midnight, waiting for government cheese. It’s easy for the employed, the wealthy, or the fortunate to sit on a high horse and make these Us vs. them arguments, but the reality is that most people are products of circumstance. Therefore, it would seem logical for me to assume most people are like me; they find dignity in working and self-worth in not having to shop at Wal-Mart at midnight. Nobody is suggesting unemployment benefits are “magic” or “100% unemployment” is optimal. There are certainly unfortunate and unique circumstances at hand in the current economy, so both spending multipliers and moral political decisions need to be made.
Here’s a link to interesting research on extending unemployment benefits in Germany:
http://www.columbia.edu/~vw2112/papers/rdui_schmieder_vonwachter_bender.pdf
When multi-millionaires threaten to starve the unemployed unless they are given billions of dollars of tax cuts, we have truly entered a new Gilded Age — or perhaps the Medieval Age. Hayak’s road to serfdom took a strange twist.
Rick: “Manfred, I am so happy for you and your comfortable lifestyle.”
I am happy and thankful for my lifestyle as well, thanks. But you completely miss the point. I always understood “Econbrowser” as an *economics* blog, where one discusses topics on grounds of economic logic, economic teaching and current economic thinking.
Also, you say: “Nobody is suggesting unemployment benefits are “magic”… “. Sorry, I beg to disagree. That is *exactly* what Speaker Pelosi and President Obama (and others) have been saying. They have been saying that the multiplier effect from unemployment benefits is so big, that it puts people to work.
I just carried that logic further, and notice a contradiction. Of course, some people do not like logic. If that is the case, stay away from economic thinking. Otherwise, specifically point out the flaw in my logic.
I read the source document and I still think that he was talking about welfare benefits rather than unemployment. The rest of the quote does not specifically reference UI – “The paycheck cycle we’ve talked about before remains extreme. It is our responsibility to figure out how to sell in that environment,
adjusting pack sizes, large pack at sizes the beginning of the month, small pack sizes at the end of the month. And to figure out
how to deal with what is an ever-increasing amount of transactions being paid for with government assistance.”
Manfred, you apparently misunderstand how the economy works. Let me help. Let’s say that, in a low-interest-rate environment in which businesses are piling up cash, there is a government program which has a multiplier of 0.1. That program would cause economic activity, even though it only causes a dime of activity for each dollar spent. Typically, economic activity leads to hiring, but it is no automatic. We can see that in the variability of labor productivity over time. But unless we ask the government to hire directly, as FDR did, then the only job-creation tool government outside the monetary authority has is fiscal policy aimed at stimulating economic activity. It is indirect, but reliable once the rate of growth in activity outruns the growth in productivity.
Now, I have been keeping a pretty close ear on what Pelosi and Obama have been saying, and I’m pretty sure neither has said that jobless benefits are magic. I will assume that, instead of simply making up stupid stuff, you misheard. You said that “magic” is “exactly” what they said, which suggests you are making stuff up really, really hard, but still, I’ll assume yo misheard. Since I am assuming you misheard, let me help a bit more. Jobless benefits have a high fiscal multiplier, but that is not the only reason to pay benefits. The reason to pay benefits is that social insurance is a good thing, and jobless benefits are a form of social insurance. Some very wealthy, powerful people screwed up our financial system very badly, and in doing so demonstrated once again that a healthy financial system is a necessary precondition of a healthy economy. The deterioration of the US financial system has damaged the real economy in ways that caused economic harm to those who had no hand in screwing up the financial system. The implication here is that incentives did not matter to the economic outcome for a large number of people. Behavior far removed from them was the overwhelming factor in the losses they suffered. Cases like this involve what economists call “negative externalities”. Externalities are those effects from activity which are not captured in the private exchange. Like when bankers enrich themselves by bundling mortgages and chopping them up and pretending that risk went away “Poof!” so that the chopped up pieces were worth more than the underlying mortages, and them people who had nothing to do with the process lose their jobs because the economy needs a healthy financial system to be healthy. Externalities are a valid rationale for economic intervention, and since these externalities are negative, and need to make some positive contribution to those who have suffered the externalities for reasons of karma, equity, fairness and politics.
I hope that helped, and that you can now write things that are made up.
Manfred,
Here’s the flaw in your logic. I noticed that my 20 year old deck was missing a nail in one of the joist hangers. I added on to my deck and figured if one missing nail is no big deal, why not go for 100% missing nails. I just carried the logic further. I guess if the building inspector does not like logic, he/she should stay away from construction thinking.
Here’s another way of thinking about jobless benefits and their economic impact. Today, US retail sales reached the second higher level in history. How, you may ask, did shoppers pay for this high level of spending? Well, personal income has reached a new high, surpassing the level prior to the recession. Thus households are able to increase their savings rate and spend lots. But note, compensation did not surpass its pre-recession high. Proprietors’ income is nowhere near its prior high. Ah, but transfers…transfers are marching to new highs pretty steadily and are far above pre-recession levels. So the gain in retail sales, when seen as the product of personal income, owes a great deal to transfers – which include social safety net payments of all kinds.
Since, as noted above, the only way for government to drive hiring in a low-capacity use, low-interest rate environment without just hiring outright is to drive spending, and one way to drive spending is to push up income, then yes, Virginia, there is a fiscal multiplier.
kharris: a story from July 2, 2010 said: “Talking to reporters, the House speaker [that would be Nancy Pelosi] was defending a jobless benefits extension against those who say it gives recipients little incentive to work. By her reasoning, those checks are helping give somebody a job. “It injects demand into the economy,” Pelosi said, arguing that when families have money to spend it keeps the economy churning. “It creates jobs faster than almost any other initiative you can name.”
Repeat: Speaker Pelosi said that “unemployment benefits creates jobs faster than almost any other initiative you can name.”
If this is not very close to magic, tell me what is.
You also say: Jobless benefits have a high fiscal multiplier….
If all this is true, then let’s make everybody unemployed, and let the fantastic fiscal multiplier do its work. Because according to you the fiscal multiplier of such benefits is very high and according to Speaker Pelosi it creates jobs faster than anything we can think of.
markg,
In order to make your analogy closer to correct you’d have to add that Pelosi and Obama have said missing nails are good for your home.
Are you really that big of an idiot or are you just playing one on the internet?
Consumption (spending) has a high fiscal multiplier. Those who are already employed are already spending. Those who are unemployed and not receiving unemployment checks are NOT spending. By putting money into the hands of the unemployed, consumption increases meaning more spending meaning more money is circulating in the economy. Making those who are employed unemployed in order to receive unemployment benefits is stupid on an order of magnitude that boggles the mind.
BTW, Pelosi said that “unemployment benefits create jobs faster than almost any other initiative you can name.” We’re still waiting for you to name one.
I don’t know how people like Manfred and Joesph live with themselves. I also don’t know how Republicans claim to be Christian when they want to hang the poor and sickly out to starve and die. It seems to be this attitude that people are just lazy and not giving anybody the benefit of the doubt. I always hope people with your attitude hit the kind of rough patch that those currently unemployed or ill have had.
JUST FOR THE RECORD:
I DID NOT POST THIS MESSAGE BELOW.
It is a different Manfred
Are you really that big of an idiot or are you just playing one on the internet?
Consumption (spending) has a high fiscal multiplier. Those who are already employed are already spending. Those who are unemployed and not receiving unemployment checks are NOT spending. By putting money into the hands of the unemployed, consumption increases meaning more spending meaning more money is circulating in the economy. Making those who are employed unemployed in order to receive unemployment benefits is stupid on an order of magnitude that boggles the mind.
BTW, Pelosi said that “unemployment benefits create jobs faster than almost any other initiative you can name.” We’re still waiting for you to name one.
Posted by: Manfred at December 14, 2010 10:47 AM
DG: “I don’t know how people like Manfred and Joesph live with themselves.”
So, you say this, just because I pointed out a flaw in the economic reasoning?
Is that how economics should be done? Is this how economics is discussed in an economics blog?
As far as I can tell, unemployment benefits are paid on a biweekly (or possibly weekly) schedule in which case the payments will not align with month-end except by coincidence. I note, for example, that Maryland provides a debit card for unemployment benefits but they are paid biweekly. I think the argument that Walmart month-end spending is boosted by UI, in the example given, is erroneous.
Rich Berger: The Washington Post story refers to a biweekly phenomenon linked to unemployment compensation. I presume that Simon made a claim in that context somewhere else, perhaps directly to the reporter. I reproduced above the quote I came across, which to me was moving.
I think one consideration of incentives, is that if the unemployed view transfer into the federal extended unemployment compensation (EUC) tiers as a “given”, that can produce an incentive to exhaust the “normal” 26 weeks of state unemployment insurance/state extended benefits. To the extent this incentive exists, it will increase costs to the state UI pool. At least in my state,(HI), costs to the pool must be met by increased employer payments into the pool (some of the required increase for 2010 was deferred this year, but that was done as a one-time thing and the deficit must be resolved at some point). So you need to factor in the impact of increased employer UI costs that might result from continuation of EUC coverage.
Manfred says: Doctors say that antibiotics cure infections faster than any other medicine. If this is not very close to magic, tell me what is. If all this is true then lets infect everyone and let antibiotics do its work.
Joseph – Actually, I think most doctors would agree that amputation will cure an infection faster than any antibiotic. I also has the benefit of encouraging others to avoid infections in the first place 😉
Manfred: The flaw in your logic is this: The multiplier for UI has been estimated for particular economic circumstances — high involuntary unemployment (~10%), zero interest rates, very low inflation, due to deficient aggregate demand. No one claims that this estimate would apply in all economic circumstances. It would probably be different in a healthy economy with minimal unemployment, or in a supply-shock recession with high inflation. So for you to say that this parameter estimate makes no sense under circumstances of 100% unemployment is true, but completely irrelevant. We have an estimate for the circumstances we actually face. That estimate should inform policy decisions under these circumstances.
Reductio ad absurdum is only a valid critique of a statement that claims to be universally true, under all circumstances. The statements made for fiscal multipliers for UI make no such claims. They are, explicitly, conditional claims.
kharris: I agree with your point about people being unemployed, not through their own fault, but due to circumstances resulting from other people’s decisions. I don’t see it entirely as, “very wealthy, powerful people screwed up our financial system very badly,” however. The financial crisis was the lightning that started the forest fire, but household debt levels are the built-up fuel of fallen logs and dense undergrowth that are sustaining it. Blame there lies on poor regulation of lending, the global savings glut making credit cheap, herd mentality that house prices will keep rising, individual bad decisions, and 30 years of stagnant wages for the middle class.
Joseph: let it be stated that I do not say that, you do. But let us not quibble about minutias.
Your analogy breaks down with the fact that antibiotics do not have a multiplier effect. This effect is at the heart of the claim that unemployment benefits create jobs.
The poor will always be with us. The real question is whether the government has an obligation (or even the delegated power) to take the earnings of citizens and transfer it to lessen the suffering of the poor. James Madison was adamant that it did not have this power. States might but, not the federal government. The fact remains that a government handout based on earnings level or lack thereof completely ignores the hundreds or thousands of particular reasons any particular individual finds themselves in such a predicament. I realize not everyone has family but, most do. Why should I subsidize an individual whose own family will not and probably for good reason. Government policy should not be set because a handful of truly hard luck cases can be found and dramatized by the media.
Just as the socialization of economic activity eliminates the incentive of the market to reward productivity and innovation, socialization by entitlement programs eliminates the need for individuals to make good decisions as the consequences of bad ones can be shifted to others. I am sure there are truly deserving and desperate people needing that formula. I have been in stores on the first of the month and seen carts full of junk food and pop, ice cream and candy and nothing else. Apparently, they have money for real food but, the first of the month is party time with others money.
How to help the truly needy and avoid waste? Simple. Let people help other people, not governments.
The sad truth is that most of the people that support legalized theft to feel charitable and good about themselves will never truly help anyone else if it actually required one dime of their own after tax money or one minute of their time.
But then, what person wants to hear another lecture from a parent about poor decisions or hear about religion from a charitable organization if they can just get a check to help cover the necessities and continue down any path they wish.
One insidious effect of unemployment insurance is that it creates the entitlement mentality that you are entitled to another job exactly like the one you lost. People are taught that they need not have to be flexible in job type or location but, that they should be compensated until another job comes along that allows them to remain where they are doing what they have always done. How can an economy evolve and adapt?
Are there no prisons?
And the Union workhouses?
Are they still in operation?
From what JDH said at first I was afraid that something had happened to stop them in their useful course. I’m very glad that is not the case.
I help to support the establishments I have named. Those who are badly off must go there.
P.S. That Manfred sounds like an honest man of business. I especially like the way he debunks logical arguments by referring to extreme scenarios. He’s a person after my own heart.
Manfred – The analogy doesn’t entirely break down. Antibiotics might have a sort of multiplier effect to the extent that they prevent the spread of infectious disease.
Hitchhiker wrote:
“How can an economy evolve and adapt?”
That statement presumes there is a missmatch in skills rather than a “general glut”.
What if it is the latter rather than the former? Then subjecting people to extreme want will only depreciate their human capital (and human dignity). It will reduce our productive capacity, both locally, and nationally. Welcome to Pottersville!
Estragon: what you mention is an externality effect, not a multiplier effect as one understands it from Econ Principles books.
Those who believe that taking one man’s property and giving it to another is justified simply because the other man has less fill our prisons and our economics schools. They love to quote Dickens but they faithfully ignore the full employment of Stalin’s Russia or Mao’s China.
As a Latino friend of mine said, the poor love Chavez because he takes from the rich and gives to the poor then they link arms and watch Venezuela crumble.
Who loved the poor more, Stalin or Mao? Well we know that they both must have because they certainly made a lot of them.
Ricardo,
It’s questionable which policies generate more poor. What also matters is which policies recognize their poor. I could take you places within 10 miles of my extremely overpriviledged zipcode (19707) that would probably absolutely shock you (shantytowns). Do you want to visit the Stanton overpass or the woods near the White Clay Creek first. (By the way it’s particularily cold tonight (24 degrees right now)).
To all,
Życze ci dałby mi dodatki. Moja Polska nie jest bardzo dobry. Że jest w odróżnieniu od mojego ekonomii.
Mark
Ricardo:
No we get to watch wall street fatten their purses taking from the poor and putting the rest of us into grinding poverty. The rich stealing from the poor- this is how America crumbles.
Cl-Oregon girl:
No we poor get to watch you get rich at our expense. This is how America crumbles. I take it you thing that I have a high income. So what if I do? How does high income equal big wealth?
Manfred – As I understand the term, there may be an externality in that patient compliance in a course of antibiotics affects not only the patient, but the wider community, and the costs or benefits of the wider effect aren’t seen directly by the patient.
From the provider viewpoint though, there may something similar to a multiplier. A dollar spent treating heart disease, for example, benefits that patient alone. Assume the patient returns a dollar to the provider through taxes or premiums. A dollar spent treating communicable disease improves the health of the patient and a wider community. All else equal, the return through taxes or premiums will be greater than one (i.e. multiplied).
Manfred,
I thought I’d take a shot at your original argument. In comparing to other policies and government programs, in terms of helping the unemployed and the overall economy, unemployment benefits has one of the strongest effects on both.
However, it doesn’t necessarily exclude other actions (non-policies), such as the unemployed being employed, from being more effective. As there currently is not a policy on the table where all the unemployed become employed (now, that would be magic!), this is not an option.
Thus, the concept of everyone becoming unemployed as being the best for the economy is not being stated or implied by anyone, here or in the White House. Nor is it the logical extension unemployment benefits are the best policy for all people (employed and unemployed).
As stated by your ‘alter-ego’, we are still waiting for another, better policy to be named.
A very interesting grpahic of growth. As you watch think about economic systems.
Manfred You asked why we shouldn’t have 100% of the workforce on UI if it’s true that UI stimulates economic growth. Your obvious point being that if we rewarded everyone to not work, then output would be zero. The problem with your question is that you are implicitly assuming macroeconomics is only about one curve; viz., the aggregate supply curve. You need to let go of those Real Business Cycle theory fantasies. In economics you have to think in terms of two curves. If no one worked and everyone went on UI, then the aggregate supply (AS) curve would disappear. That part you understand. What you don’t understand is that not offering UI in the midst of a deep recession has a strong effect on the aggregate demand (AD) curve. Total output is determined by both curves, not just the AS curve.
A rational UI policy expands or contracts the UI eligibility period based on actual economic conditions. There should not be a fixed policy on UI benefits. The deeper the recession, the more generous the benefits should be.
So summing up; total economic growth is a function of both the AS and AD curves. Expanding UI benefits while in the midst of a deep recession has no negative effect on the AS curve because the number of jobseekers far exceeds the number of jobs available. But generous UI benefits do have a positive effect on the AD curve. Result: increased economic output. If we were in a full employment economy, then generous UI benefits would not make any economic sense. I get the sense that like a lot of conservatives you have a hard time thinking in terms of policies only being conditionally true. Probably has a lot to do with the conservative thirst for one eternal TRUTH.
Yeah, James, you and Bill Simon make a few observations. But what do you NOT observe in your midnight anecdote?
You don’t observe the wasteful spending by those people throughout the month on cigarettes, drugs, alcohol and lottery tickets. You don’t observe the box of donuts in the cart next to the baby formula. Why? Because you’re not looking for it. The in-kind benefits free up other sources of income for gratuitous spending.
What I take away from this account is that you have never been on unemployment. You have never been on food stamps. You have never lived in a poor neighborhood. You have never worked at minimum wage. You simply don’t understand WHY people become poor, homeless, unemployed, why they mostly stay that way, and how one gets out of those conditions.
It’s disgusting when people who have never known want assauge their guilt by treating other human beings like stray animals that need to be fed. The unfortunate can and should be helped through generous and voluntary private charity, vetting the unfortunate from the self-destructive. But the institutionalized welfare state is a source of power for the elitists and a source of dependency for the permanent underclass. You prey on human flesh!
Nothing motivates people to get off their butts and work like a deadline for benefits. It may also encourage theft and robbery, but when law enforcement is appropriately tough, working is the path of least resistance.
When people offer their services at market clearing wages, and they volunteer to do all the jobs we currently have illegal aliens doing, then you’ll see the unemployment rate come down. The biggest reason employers aren’t hiring permanent workers with the return of production is uncertainty over government imposed obligations!
Quit using children as human shields for your elitist, paternalistic policy wishes for adults. Treat adult humans like adult humans and they will surprise you with their resilience and ingenuity.
I have sympathy for the unemployed. I have had friends and family members hit by the downturn. However, we need to keep payments minimal and the period for receiving payments short. Otherwise we are providing incentives to stay on unemployment.