Unemployment Insurance Isn't Charity. It's Stimulus.

Now that the $18 billion jobs bill is headed to the White House, the next stimulus debate will focus on the $150 billion plan that would extend unemployment insurance past a record 99 weeks. One hundred weeks is an awfully long time to be living on the government's dole. It's also an awfully long time to be living without a job. But it government money helping or hurting the unemployment rate?

In this lengthy piece, I tried to give a fair hearing to both sides of the issue. I concluded -- as the Congressional Budget Office has -- that unemployment benefits are not only swell, humane things to do for our fellow Americans, but also smart things to do for our economy. Today in the New York Times, Casey Mulligan disagrees:

Economists had found that a large fraction of unemployed people delay going back to work solely because the unemployment insurance program was paying them for not working. Fewer people working means a lower employment rate, and less output because unemployed people are not yet contributing to production.

Subsidizing something makes more of it. So yes, if you pay people to be unemployed, you risk discouraging them to seek work and contribute to productivity. But Mulligan's missing two things here. First there is very little work to seek. Below is a graph that shows job openings and total unemployment (both listed in the thousands) in January 2009 and through the last six months. The unemployed-to-openings ratio for each month is on the right:

bls unemployment data.png

What does this chart say to me? It tells me that job openings have fallen year-over-year even after two quarters of positive GDP growth. In other words, we're still in a hiring crisis. Moreover, the unemployed-to-job openings ratio has increased by almost a third. Put more starkly: our economy isn't opening any more jobs than it was in the worst quarter of the recession, and still competition for those jobs has dramatically increased. There is no evidence that the job market is teaming with all these positions for which Americans aren't applying because they're getting government money to stay unemployed.

On the contrary, I see millions of cash-poor Americans (about a third of the unemployed receive benefits) taking government money that they will spend immediately in the economy. "Unemployed people are not yet contributing to production," Mulligan writes. But surely, extending limited money to jobless Americans will help them pay bills and other necessities that would otherwise go unpaid, which supports demand, production, and job creation. The Congressional Budget Office called extending unemployment benefits at a time of limited job opportunities the most timely and cost-effective job-creating stimulus out there.

Mulligan argues that it might be "just and compassionate" to extend unemployment benefits even if they contribute to higher unemployment, lower demand and lower productivity. I don't understand this position. If I could be persuaded that announcing an insurance cap would bring down the unemployment rate effective immediately, I would loudly advocate for limiting the weeks of insurance benefits to bring down the unemployment. But where are the millions of jobs these newly cashless fathers and mothers would find? They're not there. I don't think we should extend unemployment aid today simply because it's nice, but bad economics. I think we should extend jobless aid because it's nice, and it's good economics.