RALEIGH – North Carolina’s unemployment insurance system is a colossal mess.

Over the past four years, the state has borrowed nearly $3 billion from the federal government to pay UI benefits, which have soared not only because of the recession but also become of a series of benefit extensions. To reduce the state’s indebtedness to Washington, North Carolina employers are now paying a higher payroll tax on each covered worker. This rate will increase by .3 percentage points annually until the debt is repaid, thus worsening the state’s economic competitiveness by driving up the cost of labor.

Yesterday I wrote about the three schools of thought on North Carolina’s economy: the Left, the Center, and the Right. The Left wants to redistribute wealth and manipulate consumer demand to spend our way out of recession. The Center wants to foster more public-capital formation by spending tax dollars on schools, roads, and other infrastructure. The Right wants to foster more private-capital formation by removing tax and regulatory barriers to work, saving, and investing in North Carolina.

The emerging debate about how to respond to the unemployment insurance situation offers an excellent opportunity to contrast how these three groups see the public-policy world so differently.

To the Left, the fact that unemployment benefits have been repeatedly extended is good news for the economy. By taxing money from employers to give to laid-off employees, the Left argues, North Carolina is actually strengthening its economy by putting more cash in the hands of people who will buy consumer goods rather than buy investment goods (i.e. save and invest it). The only real problem is that the taxes aren’t high enough to support the current level of UI redistribution, goes the argument.

Strip away all the Keynesian claptrap and class warfare rhetoric, and what is left of this argument is that North Carolina economy will be better off if we spend more today rather than save for tomorrow. Aesop would recognize the sentiment. It is the economic theory of the Grasshopper, who ridicules the Ant for denying himself immediate gratification and discounts the reality that winter will inevitably come.

The Center and Right are both Ants, albeit of different species. They both seek investment in income-generating assets. The Center sees the prospect of a higher UI tax as unwelcome because it will divert scarce revenue into immediate consumption that might otherwise be put to use building up the community’s infrastructure – the walls, tunnels, and storage facilities of the ant colony, to return to Aesop’s analogy.

The Right sees the prospect of higher UI taxes as unwelcome not only because it will keep employers from spending money on plants, equipment, innovation, and job creation, but also because the current length and level of UI benefits discourages recipients from reentering the workforce – even now there are jobs going wanting in North Carolina because people lack either the skills or the motivation to take them. That is, the current UI system encourages people to be Grasshoppers at the expense of taxpaying Ants.

Fergus Hodgson, director of fiscal policy studies at the John Locke Foundation, has analyzed North Carolina’s unemployment-insurance mess and recommended significant changes to make the program less costly and less destructive of the work ethic. Here are some of his key points:

• The state’s UI benefit generosity exceeds that of all four neighboring states and also, on average, the after-tax remuneration of a minimum-wage job.

• Since 2007, the average length of UI payments has increased by 25 percent. And since initiation of the UI scheme in 1935, the maximum period of eligibility has grown by 519 percent and has almost reached two years.

• The federal government’s full funding of Extended Benefits, through to 99 weeks and at an annual cost of $424 million in North Carolina, runs out on March 6, 2012.

• Cutting state-funded weeks for UI eligibility from 26 to 20 would save between $230 million and $440 million annually and close the current shortfall immediately.

• A reduction in North Carolina’s UI benefits to match those of South Carolina would save an additional $250 million. Combined with the federal tax penalty and fewer weeks of eligibility, it would pay off the state’s UI debt within six years.

While adjusting North Carolina’s UI benefits is a good strategy in the short run, policymakers should consider a longer-term strategy of seeking waivers from the federal government to convert the system into one of worker-owned UI accounts, from which workers can spend their savings for immediate needs, education, or training during periods of unemployment.

The Center should favor such a plan because it would reduce future claims on the state treasury. The Right should favor such a plan because it would increase both private investment and incentives to work.

The Left should favor such a plan, too, because it would give workers the ability to increase their ownership of real assets and their control over their own lives. But don’t hold your breath.

Hood is president of the John Locke Foundation.