Reinstating emergency unemployment benefits, as President Obama urges, would slow growth and impose unconscionable burdens on the working poor.
State governments provide a basic benefit averaging $300 per week for 26 weeks. During the Great Recession, Washington financed additional benefits for as long as 99 weeks.
With the recovery in its 55th month, the emergency is over. Another extension would make long-term benefits de facto permanent and create another entitlement. Republican leaders are correct to insist Democrats identify equivalent spending cuts or new sources of revenue.
Advocates argue those benefits provide the strongest economic stimulus, because the unemployed spend whatever money they receive on necessities. However, their supporting studies assume other federal programs are not cut or taxes are not raised to finance benefits.
Cutting other outlays, for example on roads and schools, would have an even bigger negative impact on GDP and jobs than failing to again extend unemployment benefits, because some of the latter would not be spent but rather be used to pay down credit cards and other debt.
Additional taxes to pay for more unemployment benefits would impose a terrible burden on the working poor—the very folks Obama constantly reminds need the most help.
Unemployment benefits are financed by federal and state payroll taxes, which like the social security tax, cut off when a worker’s wages exceed a cap established by the various states, according to federal guidelines. The average limit is about $12,000.
Although these taxes are generally paid by employers, economists argue those reduce the wages employers can pay low income workers by a similar amount. Indeed, some of the extended unemployment benefits paid during the recession were financed by a special federal levy that hit low income workers hardest of all, making extended benefits a cruel hoax on the working poor.
Unduly long unemployment benefits in an economy the President says is picking up steam encourages many unemployed to postpone serious employment searches. From Wall Street to Main Street, white collar professionals have delayed accepting lower pay and changing occupations by running down savings and collecting maximum unemployment benefits of about $300 a week.
Most could easily earn multiples of those amounts even by accepting positions at somewhat lower status than their old jobs. It takes a rather twisted view of social justice to raise taxes on the working poor to pay professionals not to work but that is exactly what federally-financed extended unemployment benefits do.
A recent study by the non-partisan National Bureau of Economic Research indicates extended unemployment benefits caused most of the persistently high unemployment after the Great Recession.
By raising the cost to employers of hiring low wage workers, higher payroll taxes to finance benefits discourage employers from adding new jobs—especially in depressed areas. And extended benefits discourages workers from moving from high unemployment locations—for example coal mining communities in West Virginia—to more rapidly growing states—Texas and South Dakota where the oil and gas boom is driving growth.
Like so many of Obama’s well intentioned policies, emergency unemployment benefits slow growth, limit jobs creation and incentives to work among many well-educated Americans and place the greatest burdens on the working poor.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.