Chris Edwards

Extending the extra unemployment insurance benefits would be bad for the federal budget and bad for the economy, and there is a better long-term solution for unemployment than the current UI system.

With respect to the budget, the proposed benefits would mean about $50 billion of red ink next year, adding to the huge burden of debt we are imposing on young people. There is no free lunch in subsidy programs: Someone will have to pay the bills.

With respect to the economy, some analysts claim that more UI spending will be stimulative, even though Congress already has $1 trillion of deficit spending in the pipeline for next year. Rather than stimulating anything, such huge deficits are destabilizing financial markets and damaging business confidence.

Furthermore, any stimulus from UI benefits will be counteracted by the anti-stimulus of the higher taxes needed to pay for them. Many states have been raising their UI taxes on businesses in order to replenish their unemployment funds, and these tax increases are surely harming job creation.

Another negative effect of UI benefits is that they increase unemployment because they reduce the incentive for people to find work. Higher UI benefits delay the need for people to make tough choices about their careers, such as switching industries, taking lower pay, or moving to a different city. It's a basic rule that when the government subsidizes something, we get more of it.

Fiscal experts Martin Feldstein and Daniel Altman found that the "most thoroughly researched effect of the existing UI system on unemployment is the increase in the duration of the unemployment spells. By reducing the cost of remaining unemployed, UI benefits induce individuals to have longer spells." Similarly, Larry Summers, a former top economist to Presidents Clinton and Obama, concluded in his academic work that unemployment benefits contribute to long-term unemployment.

Our UI system causes other problems. It suppresses personal savings because people expect the government to care for them when they are unemployed. That is harmful because personal savings are a key source of economic growth—savings get channeled into capital investment, which ultimately raises productivity and wages.


Chris Edwards

Chris Edwards is the director of tax policy studies at the Cato Institute, and editor of www.DownsizingGovernment.org. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.

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