Today, the WSJ carries an editorial from Harvard economics Professor Robert Barro entitled, “The Folly of Subsidizing Unemployment.” It explores a theory I subscribe to (and have been writing about for months) that the unemployment rate is higher than it should be due to the extension of jobless benefits from 26 weeks to 99 weeks.
Barro’s argument is the same one used in the 1990s that led to welfare reform in the United States. “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.” In other words, the program distorts incentives for people to look and acquire a job.
There is a balance that must be struck between compassionately assisting the unemployed and incenting them to search for work. Barro’s conclusion: “…if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.”
The veracity of this argument shows up in the weekly jobless claims. When Congress allowed the jobless extension to stop, we began to see a large drop in weekly claims which appeared on July 9th. When the program was restarted, we had a surge that culminated with a 500k+ filing on August 13th. Both should have been anticipated.
What a different world we would be in right now if the unemployment rate was 6.8%. We’d be struggling, but the country wouldn’t be at a subterranean 50% consumer confidence level. I think one of the most telling comments from this weekend’s Jackson Hole meeting came from a foreign central banker who said he wanted to get out of the meetings and away from all the doom and gloom in the United States.
This is only one part of the puzzle that needs to be solved for the U.S. to get back on track. But it seems to be a simple one to address.
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.