The Best Stimulus

The Recovery Act is President Obama's most significant economic achievement to date, but it is also highly controversial. Some of the controversy is silly and manufactured, like that egregious Rasmussen poll that found half of Americans think the stimulus created no jobs. But some of the controversy is well-placed. After all, stimulating a $14 trillion economy in a downward spiral is a bit like performing full-body surgery on a dying patient when you're not sure what's killing him -- so you operate on everything. Sometimes the kitchen sink is your best and only tool.

But there is one thing I think most people (cough, Jim Bunning, cough) agree on: unemployment insurance.

In a thoughtful post about stimulus spending and its effect on employment, Reihan Salam writes:

It's not clear that additional federal funds for unemployment insurance and food stamps actually reduce unemployment.... The straightforward case is that these measures put cash in the hands of cash-poor individuals, and thus the funds were likely to be spent rather saved, thus helping to maintain demand.

That last part is exactly right. More money in the hands of cash-poor individuals is one of the best ways to reduce unemployment because they're more likely to spend their next marginal dollar, which gives you the biggest bang for your buck in terms of juicing demand. The Economic Policy Institute's Josh Bivens did a nice podcast a few weeks ago making the cogent point that personal income minus government transfers is down eight percent since the recession began, but that automatic stabilizers have kept overall disposable income even.

The freshwater rebuttal to this argument is that Americans don't respond to these kind of stimulus programs because they think the government will tax the money back into their coffers in a few years. I have limited sympathy for this argument. The vicious cycle of falling demand -- employers take in less revenue, and fire workers, so jobless workers buy less, so employers take in even less revenue -- is too self-perpetuating to preclude government intervention. And the simplest government intervention is to give money to the poorest Americans who (1) have the greatest need for extra change and (2) will spend in throughout the economy almost immediately.

Unemployment insurance is also preferable across the ideological spectrum to hiring credits. Economic conservatives argue that hiring tax credits -- for example, eliminating payroll taxes for all new 2010 hires, as the Senate jobs bill does -- are highly wasteful. First, thousand of dollars chase hires that would have happened anyway. Second, even if you truly incent some hires, you're biasing employers in favor of labor rather than capital investments, which can hurt output and reduce wages in the long-run.

Even the Congressional Budget Office, which puts stock in the job-creating power of tax cuts and hiring credits, says unemployment aid is the number one most effective policy to reduce unemployment -- even though it's not explicitly an employment policy. Here's the graph from the CBO's latest employment policy report:

Cumulative Effects of Policy Options on Employment in 2010 and 2011,
Range of Low to High Estimates

As Megan lucidly explained in a post blasting the horrific tactics of Sen. Jim Bunning, the argument against unemployment insurance is straightforward, but insufficient. It goes like this: "giving people unemployment assistance has a negative effect on work: the easier it is to stay out of the workforce, the more people will do it." That's a reason to limit unemployment insurance, especially -- it's aid, not a way of life -- but it's not an argument against it.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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