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Blog

    Extending Unemployment Benefits Will Extend Recession

    07/23/2010

    Today, President Obama signed legislation to extend unemployment benefits. Congress claims this measure is both necessary and beneficial. Art Laffer wrote an excellent piece in the Wall Street Journal a couple weeks ago explaining why such claims demonstrate flawed and dangerous thinking. Extending benefits will extend unemployment.

    People respond to incentives. As Laffer points out, if unemployment benefits provided a person with $150,000 a year, there would be no reason to find a job. Guaranteed benefits remove an incentive to seek employment. This also forces companies to pay workers more than unemployment benefits—even when their services do not merit it—thus, removing a company’s incentive to hire more people.

    Empirical data supports this assertion. Laffer includes a fascinating graph in his article charting the relationship between the unemployment rate and the payment amount and duration of unemployment benefits. A direct correlation exists: as unemployment payments increase and extend, the unemployment rate rises. The historical evidence suggests that this new legislation will not foster economic recovery, but prolong high unemployment rates.

    Advocates of extending unemployment benefits make the argument that this will give people more money to spend and stimulate the economy. This disregards a fundamental concern: this money has to come from somewhere. Every dollar given out in unemployment benefits is a dollar that cannot be spent elsewhere. There is no net gain; redistribution cannot create prosperity. And as Margaret Thatcher quipped, the problem is the government will eventually run out of other people’s money.

    Our country quite literally cannot afford to continue extending benefits. The government has created a shortsighted and temporary fix instead of a solution. Their inability to address the long-term issue could cripple our already ailing economy.