Extending unemployment benefits

One of the proposals we hear for stimulating our economy is extending unemployment benefits.  If a worker has been out of a job for 26 weeks, the benefits typically stop.  Extending payments for a full calendar year will supposedly improve the economy.

Why does it make the U.S. more competitive and vibrant if we tax working Americans to give money to non-working Americans?  In a cyclical recession, an unemployed guy in Michigan could reasonably wait around for a year until things picked up and he could find a job again.  Those extra 26 weeks of unemployment benefits enabled the guy to stay in the same house and be available when his skills were needed, oftentimes by his former employer.

Whatever we’re in right now, however, doesn’t seem to be part of a business cycle.  We handed over most of society’s wealth to our least productive citizens (realtors, mortgage brokers, Wall Street mediocrities).  We raised taxes until business moved offshore.  We dumbed down our schools until companies could find better educated workers in countries where people live very comfortably on $5,000 per year.  Do we seriously believe that Michigan is going to bounce back within our lifetimes, much less within the proposed 52 weeks of extended unemployment payments?

An unemployed worker in Michigan needs to move somewhere with a lot of new jobs being created and not too many highly skilled unemployed people competing for those jobs (state-by-state statistics).  Certainly he is going to have to move to another state.  Possibly he may need to move to another country.  Handing out 52 weeks of cash instead of 26 weeks seems likely only to delay the inevitable.  The guy will be a bit better rested when he finally does move, but he will also be out of practice from not having worked for a year.

Could it be that extending unemployment benefits is a sensible practice that worked in cyclical recessions, but we’re now trying to apply it after a major structural shift in the U.S. economy?

13 Comments

  1. Roger

    December 14, 2008 @ 11:02 pm

    1

    A big benefit of unemployment is that it doesn’t force people to do short term actions that have negative benefits.

    As an analogy consider owning stocks and then getting a tax bill that forces you to liquidate some of those stocks to pay the bill. It would be better for all for both sides to wait till better times.

    An unemployed person with zero income has to start considering liquidating 401ks (bad for all involved), dumping transportation (which makes them less mobile and less able to accept other jobs), dropping any education courses they may be taking etc.

    Basically the more money and income you have the more agile you are you and able to react to changing circumstances, including moving to other locations and industries. I consider the money paid in unemployment as a form of lubrication. Sure some of it is wasted on beer and cigarettes but I can live with that. In a really bad economy, more and longer lasting lubrication is just fine.

  2. Ray Fraser

    December 15, 2008 @ 8:13 am

    2

    My unemployment check barely covers the cost of continuing health care through Cobra. My wife is traveling once a month to Texas for cancer treatment partially due to better funded hospitals (with newer equipment and more research money than Michigan hospitals). Most of my assets are tied up in a house that will not sell, but is still taxed and requires maintenance. Moving to a job in another state that only lasts for a year would be insane. I also am a programmer facing at least a 20% cut.

    There is no way Michigan is going to bounce back in 52 weeks. Without an unemployment check I would panic and likely sink even deeper than my knees (current level) in our economic quagmire.

    I have reduced my food costs and increased my health by bicycling to markets early in the morning for huge markdowns on yesterday’s prepared food items. I took the worst cycling fall of my life recently and rather than tumbling in a tangled mess with my bicycle I slid 20 feet comfortably without receiving a single scratch or bruise (yes the roads are now icy in Michigan – even more so this year due to economic cut backs).

    From mind of the eminem of my day (Marshall McLuhan) – automobiles are extensions that result in “amputations” of ones legs leading to obesity. I strongly believe that with proper investments in new technology and improved infrastructure many more of us would be pollutelessly pedaling into the future.

    Let the big 3 sink but please don’t force those losing their jobs as a result to panic.

  3. philg

    December 15, 2008 @ 9:45 am

    3

    Ray: I didn’t mean to imply that unemployment benefits were lavish or unnecessary. But as you said, Michigan is not going to be in any better shape 52 weeks from now. Any house in the U.S. is unlikely to be worth more in 52 weeks than it is right now. A programmer’s main asset is a resume that lists successful projects developed. It is better to be working and solving someone’s problem than sitting at home. If your wife needs to be in Texas periodically, why not move to Texas? The state has been creating jobs while Michigan has been losing them. Despite a massive tide of immigration, the unemployment rate in Texas is about half that of Michigan’s (maybe less than half when you count “discouraged” workers). The tech industry is much more vibrant in Texas. Texas has no income tax.

    Given the prejudice that employers have against hiring older programmers, I think that you’ll interview a lot better if you say “I was laid off in Detroit, so I sold my house and moved down here to Texas” than “I was laid off in Detroit, so I waited until unemployment benefits ran out, then started to think about finding a job in another state.”

  4. John

    December 15, 2008 @ 8:28 pm

    4

    I’m born & raised in Michigan (51 years). It is hard to think about leaving the state. All my family is here (except two cousins that moved to Texas in the ’81 recession, and a nephew that just moved to PA).

    Cost of living seems low here, if I move to Chicago/East Coast/West Coast/Texas it seems like housing will cost much more. Good luck to anyone trying to sell a Michigan house, they are hardly moving. Some good friends of ours had their house listed for 2+ years and finally let it go back to the bank. (he made about 3x average household income, and could afford the financial hit)

    Your suggestion of mobility sounds good, but what about a family where the spouse has a moderately decent job? Split the family, or have two people looking for work in a new location. Perhaps moving works best for single people.

    And given the direction things are heading, personally I feel like Michigan is just leading the nation. Every other state will be where we are now in 12 months. (12% U6 unemployment)

    Where is this mythical “somewhere with a lot of new jobs being created”?

    PS to Ray: you might keep an eye on MSU for jobs. The mood on campus is good since we just received the FRIB project. There is an enterprise business system project going on, I think they were hiring 120 programmers (Java?). (I don’t have any direct knowledge on current activity there) http://ebsp.msu.edu/ Jobs are posted for existing employees first, it might be good to get anything on campus and then move around. Best wishes to you and your wife.

  5. philg

    December 16, 2008 @ 5:53 am

    5

    John: Where are new jobs being created? In almost every U.S. state except Michigan! Michigan is one of the only U.S. states with a falling population (source: http://blogpublic.lib.msu.edu/index.php/2007/12/27/michigan_s_population_falling?blog=5). Despite the fact that people are leaving your state, they aren’t leaving as fast as the employers, which is why Michigan’s unemployment rate is so high. California, Texas, and Florida, by contrast, have had huge population growth over the past few decades. They’ve created tens of millions of jobs. If they have unemployment it is because they’ve had even faster immigration than job growth.

    What about a family where the spouse has a good job? Unless that job is in government or health care, it is probably time for both partners to look for jobs in another state. Until then, they should wake up every morning and thank God that one of them has a job despite the fact that they’ve chosen to continue to live in Michigan!

  6. Chuck

    December 16, 2008 @ 2:10 pm

    6

    Unfortunately, California, Florida, and Arizona (along with Michigan) have been leading the charge in shedding jobs recently (http://www.bls.gov/news.release/laus.htm, Table C in particular).

    However, Texas does seem to be an exception to the misery with moderate unemployment and decent job growth. Perhaps I’d have made that move in a different season of life. For now, I’ll stay in cold, corrupt Illinois.

    Michigan, to me, is a strange case. It has world class universities, valuable natural resources, cheap real estate, easy transportation access via water or air, and has vacation areas on the west side of the state that rival Cape Cod and other East Coast areas. It seems like it should be more successful than recent history shows.

  7. philg

    December 16, 2008 @ 2:40 pm

    7

    Chuck: Thanks for that bls.gov link. I’m not sure what I can learn by comparing absolute numbers of jobs lost when states have very different total population sizes. Michigan lost nearly as many jobs as California in October (19,600 versus 26,400), but the state’s population is a tiny fraction of California’s (10 million people versus 36 million).

    Why is Michigan doing so badly? That’s a question for historians. When it comes to spending tax dollars, however, it seems like a very unwise investment to use those precious funds to encourage jobless folks in Michigan to stay put. If we are ever going to pay for the trillions of dollars that our government is currently throwing into the fire, what we need are more taxpayers, not more people cashing government checks every month.

  8. Walter

    December 16, 2008 @ 5:18 pm

    8

    In answer to your final question, we are trying to convert unemployment insurance from an insurance program into an entitlement.

    In an insurance program, the benefits paid out all come from the premiums paid in. In the case of unemployment insurance, the premiums were paid on behalf of the employee by the employer. The government only acts as a go-between, collecting money from employers, and paying out to former employees.

    Like any insurance program, not everyone collects. The employees who never get laid off ended up paying premiums (by way of their employer) into the system, and never pulling anything out. The ones who got hit by the hazard, and did get laid off, ended up collecting not only from the premiums paid in one their behalf, but also from the premiums paid in on behalf of those who never collected.

    An actuary works the probabilities and the statistics so that the fund never runs dry. This assumes that the overall unemployment statistics remain unchanged. When Congress mandates extra weeks on unemployment compensation without saying where the added money is to come from, they virtually guarantee that the system will run out of funds. When that happens, the system will either have to default on the promises made by Congress, or get funding from some other source than employer paid premiums.

    If Congress appropriates money to pay the extra benefits, it’s a new entitlement. If Congress forces the states to do this, it will just drive a few states bankrupt. And if it mandates that employers who have laid off a lot of workers, like the auto giants, pay up the extra premiums, it will just undermine the bailout that has been supposedly given them to stave off bankruptcy.

  9. From Texas

    February 17, 2009 @ 12:45 am

    9

    Last Year, I was laid off from two jobs!!! One, as a banker for JPMC, for the last 5 years. Two, as a finance manager for ford. I also graduated this year with my dual major in accounting/management and a minor in spanish.

    NO JOB IN 6 MONTHS! Texas is suffering and I have looked and applied for the few job openings we have had. I have even tried subbing but so many ppl are without jobs, subbing gigs are hard to find.

    I too am struggling to make ends meet and I do not care where the money comes from. I have been paying my taxes for 10 years and I am happy to share with anyone who was let go from work.

    I feel that more should be done such as paying the entire health premium, as I have POF, I can not afford to go to the doctor or medicine.

    Personally, I feel that if a tax credit or tax brake was given to employers who stopped taking jobs overseas, the economy would be cured. So many ppl little by little were loosing their jobs to outsiders that the job market has been saturated. Also so many students have graduated with no where to go. Our Credit system where credit card companies are charging 29% are also responsible and should let go of the greed.

  10. fern

    February 23, 2009 @ 11:47 pm

    10

    Lost a job in TX in June of 2008. Prior to that I was a VP with a six figure income. I lived in the DFW area and I can assure you I would not recommend someone moving there. Housing is stale and taxes are BAD. Fortunate to sell house fast at a loss of 40K. A $230.000 house has a tax rate of nearly $7000 +- a year. The home owners ins. is high with deductables of generally not less than $2,500. At first it was $5,000 decductable. Following year offered a higher premium for half. Texas is NOT what everyone thinks….just because there is not state tax. Try TN or GA. Family of three is now living on unemployment and forced retirement….early. Moved the family three times in six months. Now have a small home….wanted to pay if off…..but the stock market is killing all my funds that were saved. Thankful for the unemployment benifits as they have helped pay the Cobra bill and help on food.

  11. jesse

    March 7, 2009 @ 3:44 am

    11

    My husband lost his job (terminated) because of at will employment law in Iowa. We believe it was b/c he broke his leg at work and filed workman’s comp. Anyways, there is no position for him to return to like construction in off seasons. We did not expect it and yes extending that will help. It keeps the bills paid for while he continues to search for jobs, just barely though. We are just lucky I carry the ins. through a hospital I work at. Extending it makes sure we don’t foreclose on the home we just bought in October. 3 wks later he was fired from his job. We also have other liabilities we owe. Believe me this is fair compared to if we didn’t have unemployment. There would be less income, we could always just go to dhs and apply for welfare, fip, foodstamps, medicaid. That costs would be far more expensive for the economy. You can get welfare for 5 yrs or more when extending unemployment is far less of time and money for taxpayers right? Believe me it depresses my husband that he busts his ass to be thrown out when he got a raise 1 wk before he broke his leg then come back 1 month later to be fired a day later. We were granted unemployment b/c there were no grounds. We didn’t choose that lifestyle to be unemployed, believe me I hate welfare!!!

  12. Ray Fraser

    February 3, 2010 @ 8:41 pm

    12

    Perhaps Michigan’s future isn’t so bleak after all! From Governor Jennifer Granholm’s State of the State Address February 3, 2010:

    Our first stop is south and west of here…in Battle Creek, a community that’s working hard to find opportunity in the global economy. My nine overseas jobs missions have brought more than a billion dollars in foreign investment to Michigan and have resulted in 11,000 jobs. No city in Michigan has enjoyed the benefits of foreign investment more than Battle Creek, because no community has done more to strategically target this sector and to welcome these firms. As a result, companies like Denso and Tokai Rika have become pillars of the local economy and are drawing other Japanese companies and new jobs to the area. When I was in Japan last year trying to persuade the electronics manufacturer Toda to choose Michigan over South Carolina for its new factory, I was able to close the deal because Battle Creek could be Toda’s new home.

    Now… over to Kalamazoo, where for more than a century people have been earning their livelihoods in what we now call the “life sciences.” It hasn’t all been smooth sailing for Kalamazoo. But when the area’s major pharmaceutical employers downsized, Kalamazoo reinvented itself, raising the nation’s largest community-based venture capital fund that helped launch 33 new life sciences companies. And with help from the state, Kalamazoo won a major expansion by the research company, MPI in 2008, an investment that is bringing 6,600 jobs to the area.

    If you make your way from Kalamazoo to the West Michigan shoreline, you’ll see a region from Holland to Muskegon gaining new life from $1 billion in advanced-battery manufacturing investments, creating 5,000 jobs. These aren’t today’s batteries that start your car in the morning; they are the critical components that power the electric vehicles our automakers are rushing to bring to market.

    Johnson Controls-Saft already has a facility in the region, and is in the middle of another major expansion…and two other battery companies – fortu power and LG Chem/Compact Power – are checking out the neighborhood. These advanced-battery companies and others like them aren’t coming to Michigan by accident. They are coming because last year we passed the nation’s most aggressive set of incentives for battery manufacturing. Two years ago, I was calling on the leading battery-technology companies to interest them in coming to Michigan. Today, they are calling us to figure out how to get in on the action here. Michigan is well on the way to becoming the hub of this new national battery industry.

    Crossing the bridge back down again, we head toward the Saginaw Valley, home to Dow Chemical and the innovative products it makes. Dow’s latest contribution to solar-energy technology is truly revolutionary. This is the Dow PowerHouse Solar shingle. Costing little more than a traditional shingle, it will produce electricity that you can use to power your home or sell back to the electric company. Pending final approval, Dow will manufacture this game-changing product close to home, bringing 6,500 new jobs to the Saginaw Valley region.

    Two years ago in this chamber, I told you that if we put the right policies in place, we could turn the Saginaw Valley into the Silicon Valley of the clean-energy industry. Today, that prediction is coming true.

    Thanks to our bipartisan efforts – six major solar companies have announced investments totaling almost $2 billion in the region, investments expected to bring over 12,500 jobs to the area. One of these companies, Hemlock Semi-Conductor, the world’s largest producer of polycrystalline silicon, a key ingredient of solar panels, is already expanding its production facilities in the Saginaw Valley for a third time. And that investment is now bringing solar-panel manufacturers like Suniva and GlobalWatt to the area. In fact, GlobalWatt literally left Silicon Valley in California to set up shop in an abandoned auto plant in Saginaw.

    Sorry Philip for not following your example and summarizing the above in my own words rather than simply quoting from her speech (I am sure my own words would not carry the same meaning as those directly from my Governor).

  13. philg

    February 3, 2010 @ 9:29 pm

    13

    Thanks, Ray. She certainly sounds like an inspiring politician.

    http://boss.blogs.nytimes.com/2010/02/03/20000-reasons-not-to-hire-someone/ has the business owner’s perspective on unemployment insurance’s effect on a company’s willingness to hire new workers.

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