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Busch: The Conflict of Economic Compromise

On Tuesday, President Obama cited the extension of the long term jobless benefits as one of the major reasons for why he was willing to compromise on tax cutsfor high income earners. With the unemployment rate increasing to 9.8%, almost every economist and strategist on CNBC believed that this extension was the humane thing to do to help them.

What's interesting is the dilemma it generates from a job creation standpoint. The federal government sends out the benefit checks, but businesses help pay for it. In general, US businesses have to pay for laid off workers (not fired) as long as those workers continue to file under the extension. The entities likely most impacted are small to medium sized firms.

These are precisely the employers who have not been hiring and are needed to create growth for the United States. This is problem with government and government intervention in the economy as policies create crosscurrents. While no one would disagree that helping the jobless is what we want, the question remains as to what is the best way to assist them.

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CNBC.com

Income or wealth transfers to the unemployed are necessary during a time of crisis to smooth job transition.

The payments continue to aid the workers while also aid businesses where the jobless use the payments. If the US was running a sound fiscal policy, this would be no problem to do.

However, this is not the case as the red ink remains north of $1 trillion. At some point, the structure of the payments actually do more harm as they increase the fiscal deficit, increase costs on business and worsen conditions for job creation.

At the end of 2009, the San Francisco Federal Reserve researched how jobless benefits impact workers decisions on employment. They concluded that if jobless benefits had been held to it's normal 26 weeks, the US unemployment rate would be a full 0.5% lower. As the WSJ reports, the San Francisco Fed notes that the extension of jobless benefits may "reduce the intensity" with which the unemployed search for work. "Longer term, this could lead to a higher level of structural unemployment in the economy as workers' skills erode."

Fortunately, this is not the central plank of the President's compromise with Republicans. The extension of the Bush tax cuts is not a new stimulus, but avoids a big negative tax hike. The cut in taxes for social security is a double positive: both taxpayers and businesses will pay 2% less on income up to $106, 500. Unlike the jobless benefit extension, this could increase GDP by 0.5-1.0%, increase employment and increase tax receipts for the US Treasury to reduce the fiscal deficit. (Yes, I realize it'll have to generate $900 billion to do it.)

The Senate takes up the compromise bill today. While there remains opposition within the Democratic Party over portions of the compromise, the plan has merit and is supported by major business groups like the NFIB and US Chamber of Commerce. It's not great policy, but overall it will accomplish what is needed for the short term. It must pass.


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.