How Big Should The Safety Net Be?

 
Derek Thompson looks at the unemployment insurance (UI) debate:

The San Francisco Fed has weighed in with its own report on the effect of UI on unemployment. The verdict: "We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%."

Both the White House and the Fed expect unemployment to remain above 9% by the end of the year and above 8 percent through 2011. This will create significant pressure for benefits to continue, especially since the Congressional Budget Office considers UI one of the most effective fulcrums for raising aggregate demand and creating more work hours. But eventually, UI could unnaturally extend periods of unemployment, costing the government billions of dollars (both in spending and foregone tax revenue) and subsidizing the atrophy of our labor force's skills. Like so much about the federal deficit, jobless benefits today are necessary and potent medication -- but they should not come with permanent refill option.

(Image from Cellania)