RALEIGH — It may sound counterintuitive to say so, but the latest news about North Carolina’s trust fund for unemployment compensation — that the balance is so low that the state may have to borrow from the federal government for the third time this year to make payments — is not all bad news.
Yes, of course it’s bad news that North Carolina’s unemployment rate has stayed stubbornly high and above the national average for much of the past couple of years, resulting in significant payments out of the trust fund. But those who argue that the state’s predicament is due to excessive cuts in the unemployment-insurance tax rate in the mid-1990s are missing the point. Yes, the state did have one of the fattest unemployment-insurance trust funds in the nation, reaching $1.5 billion at one point. But North Carolina was much better off with a lower, more reasonable amount in its fund — and is likely better off today seeking an occasional loan from the Feds, even if interest is involved, than if it had accumulated a huge reserve in a government trust fund.
The issue at hand, ladies and gentlemen, is called “opportunity cost.” It refers to the basic economic principle that the real cost of doing something (or not doing something) is the foregone opportunities associated with your decision. The real cost of buying a hamburger at McDonald’s is not the loss of a couple of pieces of Treasury-issue paper. It consists of the taco, the hot dog, the hoagie, the salad — whatever you might have purchased instead with the same bucks. Similarly, the real cost of watching the recent 2003 MTV Music Awards (in addition to the loss of a few brain cells, your dignity, and any shred of respect others may have had for you) was the programs not seen or the other entertainment options not pursued.
In investment terms, the cost of purchasing a stock is properly thought of as the investment (or consumption expenditure, actually) that you had to forego in order to buy it. If the real return on your stock is higher than that of the alternative investment, then your benefit exceeded the cost.
That’s the issue with regard to government trust funds. There are significant opportunity costs associated with accumulating large amounts of taxpayer money in a trust fund. If left in the hands of those who originally earned it, the money could be profitably invested in the private-sector economy, creating jobs and raising incomes. To build up a reserve against the occasional risk of a depleted UI trust fund is to believe that the costs of depletion exceed the likely investment return on those dollars in the market.
Within the wacky world of unemployment insurance, however, such costs are likely to be low in any economic downturn short of a massive depression. Short-term loans from the federal government to pay UI benefits are not only automatic but are also frequently interest-free. In effect, states with accumulated balances — all of which are required to be held in federal securities, by the way — cross-subsidize states with low or no balances. For years, North Carolina taxed its employers (directly, the employees indirectly) in order to park funds in Washington for other states to borrow. This was silly. Our lawmakers were right to end the practice.
In the current situation, the third loan to NC’s fund this year, it looks like we might well have to pay the federal government interest. But this is going to come to about 6.5 percent on a relatively small sum. Obviously, it would be best if our economy improved and the need for large UI payments was lessened. In the interim, however, the interest cost is likely to be far smaller than the opportunity cost North Carolinians would have paid over the past decade or so had excessive amounts of their money been sent off to Washington.
I’m not arguing that the current system makes sense. North Carolina’s actions were rational only in the context of an unemployment-insurance framework that punishes thrift and rewards risk-taking. Years ago, my John Locke Foundation colleagues proposed an alternative system based on private UI accounts owned and controlled by individuals. Within such a model, unspent balances wouldn’t result in subsidies for others or lost returns. Workers could opt to accumulate significant funds in their accounts, earning market rates of return, and would actually have a strong incentive to minimize claims on the money by keeping their spells of unemployment to a minimum. (Scads of research suggests that the current UI system lengthens periods of unemployment as displaced workers seek to maximize their UI payments a la George Constanza’s antics on “Seinfeld”).
Until we reform unemployment insurance, however, states will have to fashion policies that best fit the system we have. Despite North Carolina’s shaky economic performance and our resulting bouts with unemployment, state policymakers basically got the policy mix right here — despite simplistic complaints to the contrary.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.