Unemployment Benefits: Too little to be effective.

Tuesday, December 22, 2009

Unemployment compensation has been a tool for reducing the impact of any downturn since the 1930s. The idea is simple. In a consumer driven economy, when employers feel the need to lay off workers, one of the most effective tools at your disposal is to continue to pay the unemployed for humanitarian reasons, of course, but also so that their demand for goods and services will not decline so substantially as to make matters worse.

Presumably, unemployment compensation – money we pay to the unemployed in lieu of the income they had been earning – should be sufficient to cover rent and mortgage payments, but it’s not, particularly for middle class families whose monthly costs for housing are substantial. Simply put, the upper limits on unemployment compensation are too low for many of the families whose jobs have been lost. The result is not only the dramatic drops in consumption that unemployment compensation was intended to avoid. It’s also the loss of the family home and the equity in it which, in better times, the family had accumulated and might realize again when the economy recovers. For the family, it’s a catastrophic outcome. Better to have a separate program that makes partial mortgage (and rent) payments for the unemployed to banks who add the underpayments to the end of their debtors’ loans.

According to November 2008 data from the Department of Labor, maximum unemployment benefits vary by state, in the contiguous 48, between $210 per week in Mississippi and $900 per week in Massachusetts. Massachusetts is high. The next highest is Rhode Island at $641. The 48 state average is only $409 per week, maximum unemployment compensation, net of taxes. Compare that $409 to the gross (pre-tax) federal poverty guidelines shown below by family size. Needless to say, even this cursory analysis confirms that middle income families, whose incomes are significantly above these poverty guidelines, are not likely to be able to sustain themselves on current levels of unemployment compensation.

2009 Poverty Guidelines for the 48 Contiguous States
and the District of Columbia
The first two columns are from “2009 HHS Poverty Guidelines,”
US Department of Health and Human Services.

Persons in Family

Annual Family Income

Weekly Family Income
















The problem with this particular recession is that much of the un- and under-employment may reflect structural changes in the economy, industrial and geographic, which traditional fiscal and monetary policy cannot resolve – and which will not dissipate at the rate we would ordinarily expect from the recent history of business cycles.

Retraining people for jobs “on spec,” without having specific jobs in mind, is not the answer. The government needs to continue and increase unemployment compensation, to help the unemployed move to other locales where they have confirmed jobs, and to use coupons or their equivalent to encourage all Americans with incentives to buy the goods and services of specific industries and even individual businesses that have been hardest hit. Rather than talking about the greening of American industry and all the jobs it may one day create, the government should be investing heavily, on the scale and with the intensity of a modern day Manhattan Project, in subsidizing those new industry players who are willing to locate where structural unemployment is most severe.

Unfortunately, what our government has done instead is wasted hundreds of billions of dollars shoring up major financial sector companies, banks included, whose situations would have resolved themselves. (Same thing with General Motors and Chrysler.) Those free market solutions might not have been pretty, but the results would have been more satisfying. “No crying of spilt milk,” as they say. The best we can do is not make the same mistakes twice, although I doubt the Obama Administration or Congress have learned much from their lack of success. Quite to the contrary, politicians are famous for taking credit for events over which their programs had little or no influence. Claiming victory for the economic recovery that will eventually occur in spite of their misdirected bailouts will be no exception.


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