Extremists who think government support for the unemployed is holding the economy back don’t have the facts on their side.
It’s a rare day indeed when Next New Deal bloggers support economic arguments with links to the Weekly Standard, the American Enterprise Institute, and Goldman Sachs. But at this moment, in this economy, we are all singing the same tune about the absolute necessity of extending unemployment insurance and providing additional support to the long-term unemployed. So, consider our current alignment a sign of extraordinary times.
Extraordinary because six years after the recession, there are still at least 4.1 million long-term unemployed Americans who have been looking for a job for more than six months and have yet to find work. Extraordinary because despite agreement from both progressive and conservative economists on the need for government action, the congressional flank led by Paul Ryan and Rand Paul is so far outside the mainstream that they are arguing to cut benefits for the long-term unemployed. Extraordinary because the 113th Congress is so dysfunctional that these extremists just might succeed in their goal.
Protecting unemployment insurance is a “disservice” to the unemployed, Rand Paul told the morning shows Sunday. The clear logic being that those folks looking for work for the last six months have been all-too-coddled by their $300-a-week government check, when what they need is some real motivation to pound the pavement even harder.
Unfortunately for Mr. Paul and his friends, there are a few flaws in this latest version of the-up-by-your-bootstraps logic. But, don’t take our word for it. For a full outline of the arguments in support of extending unemployment insurance, we turn to the conservative intelligentsia and financial establishment.
Who are the long-term unemployed? Lazy hangers-on?
According to a report from the Urban Institute, in 2012, two-thirds of the long-term unemployed were ages 26-55, one-third had children, one-half had at least some college, and 1 in 10 were college graduates.
A large share of the long-term unemployed are people with relatively high earnings potential and personal responsibilities that extend beyond themselves. It is hard to imagine an educated worker in her prime working years with a kid at home having allowed a $300-a-week check to stand between her and a strenuous job search for over half a year.
Well, then why aren’t they getting jobs?
A growing body of empirical evidence indicates that the long-term unemployed experience “scarring” simply for being unemployed.
There is an evident shift in the curve [the Beveridge curve which serves as a measure of how quickly the labor market matches workers with job openings] for workers who have been unemployed for 27 weeks or more, unemployed workers of shorter durations have experienced no outward shift in the Beveridge curve. They conclude that being unemployed for a longer amount of time has an effect on the chances that a worker will become employed, suggesting that being long-term unemployed is in itself a cause of the persistence in unemployment.
While I feel bad for them, it’s not my problem. Isn’t unemployment insurance just a big waste of my taxpayer dollars?
With a GDP multiplier of 1.6, unemployment insurance is one of the most efficient fiscal stimulus tools. Every dollar spent on unemployment insurance contributes $1.80 to GDP. In contrast, a lump-sum tax rebate or a dividend and capital gain tax cut would provide GDP multipliers of only 1.2 or 0.4, respectively.
Emergency UI provides an especially large economic boost, as financially stressed unemployed workers spend any benefits they receive quickly. With few other resources, UI benefits are spent and not saved.
Moreover, a recent report from the Fed indicates that the declining skills of the long-term unemployed have degraded our potential for GDP growth in the future.
They estimate that real potential GDP growth has only averaged 1.3 percent since 2007, the output gap is currently about 3 percent of GDP, and the structural unemployment rate had risen to 5.75 percent by 2012 (although it is now again on a slight downward trend). They then use a modified version of FRB/US with an added role for ‘hysteresis; in labor markets–that is, a gradual transformation of cyclical unemployment into structural unemployment and/or labor force withdrawal –to analyze the sources of this deterioration, using a simulation in which the model economy is hit by a major financial crisis that is calibrated to match the size of the 2007-2009 episode. In a nutshell, they find that the post-crisis period ‘features a noticeable deterioration in the economy’s productive capacity’ and that about 80 percent of the deterioration ‘…represents an endogenous response to the persistently weak state of aggregate demand.’