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Extending Jobless Benefits Doesn't Pay Off

Here's a question for policy makers during this midterm election: Why do people work? Why take time away from family, children, religion and place it elsewhere? The answer is rather pedestrian; we work to earn wages or to receive payment for work supplied that allows us the ability to provide food, shelter and leisure.

Woman filing for unemployment
Woman filing for unemployment

From this labor, we are rewarded with payment. As George Will put it, "Money is time made tangible—the time invested in the earning of it."

This applies to individuals and groupings of individuals known as corporations. It is by their work that earnings, wages and profits are generated.

In a free market anything that encourages individuals and corporations to engage in this behavior is good for the economy and for job creation. Conversely, polices that discourage work or incentives to earn wages or profits are viewed negatively.

This is what is so discouraging about the debate on deficits, taxes and the size of government. An undercurrent lies below the discussion that suggests the government has a right to the earnings of individuals and corporations, and a right to do what it wants with those funds.

We can all agree on the necessity of some government. However, we should recall the words of Thomas Jefferson: "My reading of history convinces me that most bad government results from too much government."

Currently, there are two great examples where government largess can be seen as the problem, not the solution.

First, we can look at the debate over reducing corporate taxes. Common sense suggests cutting these taxes allows corporations to keep more of the profits they earn, in the belief that this will help them grow their business and their workforce. Research has demonstrated that this path works.

The argument against cutting corporate taxes can be encapsulated by the words of Dean Baker from the Center for Economic and Policy Research: "Businesses are sitting on $1.8 trillion in cash. How much more should we give these guys?” Give, indeed.

Your Money Your Vote - A CNBC Special Report
Your Money Your Vote - A CNBC Special Report

This is where intellectual paths diverge, with a chasm between those that want to encourage earnings and those that want to take those earnings away and spend them.

For those who believe low tax revenue is the problem, the solution lies in raising those receipts via increased taxes. This provides a way of narrowing the US deficit gap between spending 25 percent of GDP versus receiving tax receipts of only 15 percent. With this policy hubris, a slow economy and a lack of hiring can be mitigated by spending more money to raise demand, and therefore GDP. To pay for it, you raise taxes on the high earners and increase taxes on dividends and capital gains.

This thinking ignores the role of incentives and the role that those incentives play in hiring. It is consumed by the belief that the government knows best when it comes to allocating resources and therefore should have all the resources it needs to get the economy going. We are now seeing the result of these actions with unemployment at 9.5 percent and the 2010 fiscal deficit raging at $1.3 trillion.

Another example of government-knows-best thinking can be found in the extension of unemployment insurance from 26 weeks to 99—at a cost of $36 billion a year. While no one would oppose trying to help the unemployed, such an extension could do more harm than good.

According to Harvard economics Professor Robert Barro, “The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program."

Paying people 26 weeks for unemployment benefits assists them in adjusting to the loss of income, but also motivates them to keep looking for work. Conversely, 99 weeks offers no incentive to rejoining the workforce until those benefits run out.

Instead of spending $36 billion per year on extending benefits, such funds could be better spent on increasing skills and education of workers to meet the needs of today’s employers.

When we see that unemployment for those 25 and older who lack a high school degree is 15.3 percent, but 9.4 percent for high-school graduates and only 4.7 percent for college graduates, the value of such an investment is clear.

Despite arguments to the contrary, these two examples show what the U.S. can do to help the economy and unemployment without falling into Jefferson’s too much government.

Sometimes less is more.
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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.