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Busch: Politics and Unemployment

Jobs are clearly on the minds of those in Washington, D.C. The Temporary Extension Act of 2010 allows for another 14 weeks of jobless benefits to be extended to those out of work which would cost a CBO estimated $8.6 billion.

By now, most of the United States is familiar with the Jim Bunning story and how he held up a vote on jobless benefits. Bunning was pilloried by Democrats and the Huffington post for stalling funds from going to help unemployed people.

But did it?

The Chicago Tribunecarries an interesting story that asks due, "Longer jobless benefits cause longer unemployment?

"As of mid-2008, unemployment benefits ran out after 26 weeks. Under two presidential administrations and a more-than-willing Congress, however, they kept growing and growing. First, they expanded by 20 weeks, then another 13, then 20 more and then 13 more. One additional week got added to the first 13 to make 14. Finally, another six got tacked on....Add it up, and that's 99 weeks of unemployment benefits available to Illinois residents who qualify. Other states have different rules, but many also run to 99 weeks at the maximum."

"Given the rotten economy, it's easy to imagine why politicians keep pumping quarters into the jukebox. It takes time to get a job, so the long duration of benefits is not a sign of deliberate malingering. But those government checks come with an unwanted side effect, especially for workers at the low end of the economic food chain. They go a long way toward explaining why 40 percent of jobless Americans have been out of work for at least 27 weeks, the highest level since the government started keeping score in the 1940s."

"Those programs subsidize unemployment," explained Robert Shimer, economics professor at the University of Chicago. "There could be good reasons to do it, but we should be clear on the cost. It has a pretty substantial impact." Shimer estimates that the current level of benefits probably accounts for 1 to 1.5 percentage points to the 9.7 percent national unemployment rate.

If true, it's a fascinating behavioral dilemma for politicians.

If they cut the benefits (like Bunning asked), then they run the risk of being seen as Potter-likebad guys with no compassion for the unemployed. If they don't cut the benefits, the jobless rate stays artificially high heading into the fall mid-term elections and the voters turn them out. Political expectations effect economic decisions. While Democrats may believe that they have a Faustian choice over health care, they will be staring down another one with unemployment.

These decisions matter for the markets.

Consider this scenario for the 2nd half of the year: the economy continues to improve and begins to create jobs; the government is hiring census workers and will also be creating jobs (temp, but jobs); and Congress stops extending the jobless benefits which drops the headline unemployment rate 1 full point.

In turn, this will prompt the Fed to act sooner than the market is anticipating now and begin to raise rates to take out the massive monetary stimulus.

Under this scenario, we could get the unemployment rate to drop below 8% before the end of 2010 and the Fed Funds rate to be above 1%. While I give this a 20% probability, it's vastly different from what the market is anticipating and therefore provides an opportunity.

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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.