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.
- 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).
- Increased UI payments shift the labour supply curve.
- Increased UI payments will lead to increased unemployment, and unemployed people spend less than employed people, ceteris paribus.
- Maybe what we need now is more saving and investment, and less consumption.
- 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.
