Sometime next week—we don’t quite know when—President Barack Obama is due to announce his latest jobs plan designed to lift America out of its unemployment doldrums. And though we also don’t know the exact details of the plan, there’s a pretty good chance it will include several key components we’ve heard before, one of which is the extension of unemployment benefits.
Much like the President’s other likely initiatives, this idea isn’t a new one, and the White House has made the argument before that unemployment benefits are the best thing since sliced bread when it comes to stimulating the economy. In a White House briefing earlier this month, press secretary Jay Carney explained the rationale:
[Extending unemployment benefits] is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren’t earning a paycheck are going to spend the money that they get. They’re not going to save it; they’re going to spend it. And unemployment insurance, that money goes directly back into the economy dollar for dollar virtually.
So it is—and when it goes back in the economy, it means that everywhere that those people—everyplace that that money is spent has added business. And that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring.
But according to a report by Heritage’s James Sherk and Karen A. Campbell, unemployment insurance actually leads to longer periods of unemployment and does not provide the promised stimulative effect. In their paper, they address a 2004 study which concluded that each dollar in additional unemployment insurance increased gross domestic product by $1.73. But, they say, that just isn’t so. Research shows that unemployment spending does not result in workers consuming more, and workers with extended unemployment insurance benefits remain unemployed longer. “A 13-week extension of unemployment benefits results in the average worker remaining unemployed for an additional two weeks,” they report.
Funnily enough, President Obama’s new top economist agrees. Yesterday, the President announced that Princeton University economist Alan Krueger will replace Austan Goolsbee as the White House’s chief economic adviser. And though Krueger will play a prominent role in crafting the White House’s economic strategy, Heritage’s Lachlan Markay reports that Krueger’s past research doesn’t mesh with the White House’s stance on the supposed stimulative benefits of extending unemployment insurance:
Krueger co-authored a paper for the Handbook of Public Economics in 2002 that seems to undercut the economic argument for extending unemployment benefits. The paper found that those benefits tend to increase the length of unemployment by discouraging the search for a new job, and may actually encourage layoffs. Conversely, the paper also found that unemployed persons who are ineligible for benefits search harder for a job and are therefore unemployed for less time.
It’s anyone’s guess whether Krueger will change his tune now that he’s on the President’s team, but no matter. When the President launches his new jobs plan, and should he call for an extension of unemployment benefits, as expected, the reality remains the same, regardless of how Krueger addresses his earlier body of work: Unemployment benefits don’t stimulate the economy.
There certainly can be other reasons for extending unemployment benefits. Under the Obama economy, the average length of unemployment hit a new record last month, surpassing 40 weeks for the first time ever. But no one—Congress, the President, or the American people—should be under the delusion that economic stimulus and new jobs will result.
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