Democratic lawmakers and left-leaning activists are advancing a meritless argument that unemployment benefits are an economic stimulus, critics say.
That debate was renewed in the weeks leading up to the federal government’s July 1 cutoff of federal emergency unemployment compensation benefits for North Carolina residents.
“How could anyone believe that unemployment benefits are the linchpin to economic growth?” said Jon Sanders, director of regulatory studies at the John Locke Foundation.
“It was originally conceived as a temporary safety net to tide people over until they find another job. I’m not sure how it came to be viewed as the goose that laid the golden egg,” Sanders said.
A Congressional Budget Office report in 2012 to the U.S. House Committee on Ways and Means said unemployment benefit extensions actually “contributed to the increase in the proportion of unemployed people who have been seeking jobs for more than 26 weeks” during and after the recession.
The state’s decision to lower weekly maximum payouts and reduce the number of weeks an applicant may receive state benefits breached a federal law barring states from reducing benefits while receiving federal emergency unemployment compensation.
The state reduced its benefits to pay off a $2.5 billion debt to the federal unemployment system, effective July 1. The federal government refused to grant a waiver allowing North Carolina to be grandfathered into the federal benefits program as the state repays its outstanding debt. The move disqualified the state from the federal unemployment program, which allows unemployed workers to draw federal checks when their state benefits run out.
Senate Minority Leader Martin Nesbitt, D-Buncombe, was among Democrats who urged Republican Gov. Pat McCrory to save the federal unemployment compensation before the July 1 cutoff.
“It gives our economy some stimulus right now when it needs it,” Nesbitt told WRAL.com.
Democratic U.S. Reps. David Price, G.K. Butterfield, and Mel Watt urged McCrory by letter to veto the state’s unemployment insurance reform because of its “regressive impact” on the state’s economy.
They wrote that “eliminating this important safety net for jobless residents would cost North Carolina’s economy $1.5 billion in economic activity at a time when we cannot afford to drive business away.”
The Obama administration’s acting Labor Secretary Seth D. Harris said in a February news release that North Carolina would lose $780 million in federal funds because it is being cut out of the program.
Harris said the loss to the state’s economy actually would be double that amount due to a multiplier effect created when unemployed workers and their families spend the benefits dollars in local grocery stores and small businesses, pay mortgage, rent, and utility bills.
“The idea that every dollar in unemployment benefits boosts the economy by two dollars is ridiculous on its face,” Sanders said.
A recent report from the U.S. House Ways and Means Committee by Chairman Dave Camp, R-Mich., and Human Resources subcommittee Chairman Dave Reichert, R-Wash., said that after five years of operation, the emergency unemployment compensation program “has fallen far short of Americans’ expectations.”
According to the committee report, “Instead of being one of the ‘biggest stimuluses,’ as [former] House Democratic leader Nancy Pelosi once said, scholars have suggested that recent extended UI benefits actually contributed to higher unemployment.”
In previous recessions dating back to the 1950s, it was customary for federal policymakers to add 13 to 26 weeks of federal unemployment checks to the 26 weeks of state checks.
But after the 2007-09 recession, maximum weeks of benefits “soared beyond the longstanding norm to a record 99 weeks,” the report said. It also was unprecedented that three-fourths of those weeks were paid entirely with federal funds.
Spending on the federal extended benefits leapt from $20 million in fiscal years 2005-07 to $138.6 billion in fiscal years 2008-10, “an astonishing 692,900 percent increase,” the report said.
Further, recent experience has established “record unemployment benefits don’t necessarily stimulate a robust recovery or the rapid return of the unemployed to work. If they did, the benefits since 2008 would have resulted in an historic economic boom and minimal durations of unemployment,” the report said.
“Unfortunately, the opposite occurred — a historically weak recovery and continued near-record durations of unemployment long after the recession officially ended,” it said.
That congressional report was in keeping with a previous study by the Heritage Foundation, a Washington, D.C., think tank.
That report stated empirical research in a number of studies “concluded that unemployment insurance plays at best a small role in stabilizing the economy. Empirical research at the state level also finds that UI plays a negligible role in stimulating the economy.”
There are a number of reasons for that conclusion.
Because unemployment benefits are a financial cushion for the jobless, they spend less time looking for work than the unemployed who have no benefits. Those without benefits, or whose benefits are about to expire, have greater incentive to seek work and spend more time looking for employment, the study said.
Likewise, spouses of the unemployed who are receiving benefits tend to work less than those without benefits. “For married men, each dollar of benefits reduces their wives’ earnings by between 36 and 73 cents,” the study said.
Increased benefits generally are financed by debt, the report said, so they “simply transfer resources from future taxpayers to UI recipients. The lost production resulting from increased unemployment diminishes the effect of this spending, resulting in a negative return. Receiving less GDP than is spent cannot sustain economic growth.”
Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.