Friday, December 13, 2013

Why Extending Unemployment Benefits is a Bad Idea

Danny Vinik, publishing in Business Insider, discusses the pros and cons of extending unemployment benefits, but in spite of a good presentation of the issue, he draws the wrong conclusion.

Average duration of unemployment
United States - 1950 to 2010
[Image from Wikipedia commons
Click on it for a larger version]

Rand Paul had argued: "I do support 26 weeks of unemployment, if you extend it beyond that you do a disservice to these workers. When you allow people to be on unemployment for 99 weeks, you are causing them to become part of this perpetual unemployed group in our economy."

Vinik counters that the reasons for people becoming long-term unemployed are not clear. He points to various studies in support of his argument, and he is fair enough to refer also to a few that support Paul. (For the links, see his original article above; and for further research on the effect of unemployment insurance on the rate of unemployment, see this interesting page at Wikipedia that has some great links to the original research of competent scientists on this issue.)

Mr. Vinik ends with this: "Given the mixed evidence, each scenario is equally likely. Which one would you rather risk? Causing Americans to scam the government for a year or immiserating [sic] millions? This shouldn't be a difficult decision….[Sen. Paul and his Republican colleagues] may be right that jobless benefits discourage work. But they may also be wrong and that's a risk that's too big to take."

What do I take away from Vinik's piece? First, that sound public-policy research is difficult to do, and we desperately need for it to be done so that people don't act on hunches like this; and second, that Vinik's logic is a perfect example of why we don't want human agents interfering with the natural processes of the business cycle. Allow me to explain.

Public-policy science is difficult but vital.

Vinik's piece is interesting and balanced as far as it goes, but he makes two vital mistakes in his conclusions: He affirms that curtailing unemployment benefits would immiserate millions. This statement belongs among those earlier ones that he readily admits have not yet been proven to a high measure of scientific probability. Therefore, this conclusion is quite possibly just as wrong, or even more so.

He also affirms that the alternative choice, allowing a few to scam the system, does little harm. By the same reasoning, this statement is just as apt to be fallacious.

We don't want human agents interfering with natural business-cycle processes.

The problem with interposing oneself as the decider in quandaries like the one facing our legislators is that, at the same time as one gets a warm fuzzy feeling for helping potentially (but not certainly) immiserated millions, one is simultaneously-and certainly-acquiring the responsibility for creating a moral hazard.

I have discussed moral hazard before as follows:

"Kevin Dowd, in a Cato piece entitled 'Moral Hazard and the Financial Crisis,' defines moral hazard this way: " 'A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first….' "New York Times Journalist Shaila Dewan defines it as 'the undue risks that people are apt to take if they don't have to bear the consequences.' "

When a legislator thinks like Mr. Vinik and decides to increase benefits as the lesser of two evils, she spends the money of the country's taxpayers instead of her own, not only (1) to acquire a warm fuzzy feeling, and probably, to some degree, (2) to incur the favor and votes of the unemployed; but also (3) to avoid the fear (not necessarily the reality) of immiserating millions for what she believes is the relatively small cost of allowing some to scam the government, the expense of which would accrue to a large group of people including herself for whom the individual cost is small, and (4) all the while ignoring the possible counterproductivity of adding to the number of government programs that already allow people to scam the taxpayers of some very big bucks–i.e. billions and billions.

I am referring here to, e.g.,: - the unemployment program itself - agriculture subsidies - the food stamp and other dole programs - energy programs - education - fraudulent claims for disability - taxation programs - Medicare/Medicaid fraud and and lots of other abused programs.

So what is the alternative to government doling out money to avoid disappointing some sector or other of the public? I would say, first, stop playing with our money supply, and second, enforce simple and sensible regulation of the banks. But those are subjects for another day.

Then, legislators should instead leave these sticky issues to the states where experimentation can determine the best path forward. For example, should private nonprofits or, better still, individuals themselves take over their own unemployment insurance? I realize that the idea of a nonprofit helping the unemployed, or of an unemployed helping herself, seems like a novelty; but to give just one example, someone has come up with the idea of private unemployment accounts, much like our current 401(k)s, and it is currently working in Finland, of all places. (See the above-linked Wikipedia page under "Finland.")

Don't this and other novel ideas deserve at least experimentation before we do any more blind bailing out of anyone and everyone, including the unemployed?

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