"Let's shrink the economy more to hand out more compassion."

Casey Mulligan, blogging at Supply and Demand (in that order), points out that for myriad reasons, increasing unemployment insurance [UI] benefits will not stimulate the economy.

1. People not receiving increased UI benefits will tend to cut back on spending due to increased taxes, increased expected taxes, or increased saving (when the gubmnt borrows to make the increased UI payments).
2. Increased UI payments shift the labour supply curve.
3. Increased UI payments will lead to increased unemployment, and unemployed people spend less than employed people, ceteris paribus.
4. Maybe what we need now is more saving and investment, and less consumption.
5. Over the past year, consumption spending remained roughly constant while the unemployment rate jumped up... not what would be predicted by a model underlying the argument in favour of increasing UI to stimulate consumption spending.

His conclusion:

The bottom line is that UI shrinks the economy. Yes, UI may be compassionate and the "right" thing to do, but then the honest recommendation is "Let's shrink the economy more in order to hand out more compassion." Instead, CBO [Congressional Budget Office in the US] is selling snake oil. [emphasis added]

Some reflections:

• Increased UI might induce people to search (i.e. remain unemployed) longer, but there are some long term benefits from that result as they become more productive over the longer haul.
• The CBO defence of the policy of increasing UI benefits must be a sop to the econo-illiterate. I can't imagine they really believe it. If they do, the US is in serious fiscal trouble.

Comments

[Tiny Tim]

As a recipient of Unemployment Insurance benefits for the last 10 months, I can assure everyone that I would have gladly traded those payments for an atmosphere of real economic hope, instead of this administrations destruction of the greatest economic engine the world has ever witnessed. This guy can't even close a door, let alone a deal. Other than printing money, he's never made a legitimate dime in his life.

God Bless Us, Each & Everyone!

[JH]

I would say that allowing people flexibility in job choice is an effective way to increase their long term productivity.

If UI gives someone another few months to find the right job, it could translate into a productive relationship between employee and employer that lasts several years. If you didn't have UI, and only had little savings to live off of, you could be forced to accept a job with few prospects that doesn't fully utilize your own human capital, and would probably leave you unsatisfied; which is likely to lead to an unhappy worker.

Overall I think that UI increases human capital utilization. (human capital is individual knowledge correct? I don't have my text in front of me)

UI is a complicated system though, and although it's overall effect is a benefit it could use some tweaking. For instance It may be necessary to further limit the time benefits are paid out.

Cheers!