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Unemployment Benefits: Just Say No

In today’s Wall-Street Journal Professor Robert Barro of Harvard University makes a strong case that extending unemployment benefits from 26-99 weeks has impaired the economy and has halted the “summer recovery”. However, some like former labor secretary Robert Reich have argued that we need to continue the unemployment benefits and perhaps increase them. As pointed out in Barro’s article typically unemployment benefits have been extended from roughly 26 weeks to 39 weeks (an increase of 50%). An increase from 26 weeks to roughly 2 years is a 280% increase! An increase like this harbors a socialistic and European like welfare system. Unemployment benefits serve as an incentive for people not to work. Unemployment benefits do give people to become couch potatoes and lazy. Critics argue that unemployment benefits are needed to insure people can sustain living conditions while looking for unemployment. However, what these critics don’t realize is that when give people subsidies you also subsidize their expectations. In 1935, as part of the Social Security Act the government encouraged states to adopt unemployment benefits. The purpose was to provide people financial assistance in times of unemployment. Although, this program had the best of intentions the program has created perverse incentives. In Texas, the maximum benefit per year someone can make between $3,068 and $21,112. Assuming someone stayed on for all 99 weeks they could have between $5,841 and $40,194! This amount is just for one individual. Let’s say there is a married couple and someone is making $60,000 while the other is on employment benefits. This couple could potentially be making over six-figures even though one is on unemployment benefits. Why isn’t there means testing for unemployment benefits? A couple both on unemployment benefits could be making close to $80,000 per year without any work. It should be pointed out that the unemployment income is seen as taxable income. Last year however, as part of the American Recovery & Reinvestment (aka Bailout/Stimulus) the first $2,400 of unemployment income received in 2009 was not taxed.

With incentives for people not to work some say we are moving closer a European like welfare nation. For example in France, the government guaranteed 5 weeks per year in vacation. In the United States, usually after someone has worked at a company for many decades they may get a month of vacation. In France, they also have 35 hour workweeks and overtime is not allowed. Instead of getting paid more in France for additional work people get rewarded with even more vacation. A 35 hour workweek translates in 22 fewer working days per year. In total, the French get an average of 60 days off per year. According to the OECD, in 2004, the average French 1346 hours per year, while Americans worked 1777 hours per year. South Korea led the way working 2390 hours per year. I would venture to say that America has the highest if not one of the highest ratios of GDP/average working hours. All this says is that American are much more productive and efficient with our resources. Extending unemployment benefits will only decrease the number of hours worked by the average American and also decrease long term GDP growth. Clearly, folks in Washington D.C. must be aware of this and put America back on track to prosperity and stop this socialistic utter nonsense.

Barro Article:
http://online.wsj.com/article/SB10001424052748703959704575454431457720188.html#mod=most_viewed_opinion24

Information on Texas Unemployment Benefits:
http://www.twc.state.tx.us/ui/bnfts/claimant1.html#qualify

The Case for Spending Less on Education

From the CATO Institute...

Cindy Crawford: Opportunity Costs

When economists talk about opportunity costs usually people have some idea of what they are talking about, but not always. One good case I thought of to demonstrate opportunity costs is Cindy Crawford. Cindy was graduated as valedictorian of her high school class in 1984 and was awarded a scholarship to Northwestern University to study chemical engineering, but dropped out after one semester in order to model. According to Forbes in 1995 Cindy Crawford made $6.5 million (highest paid supermodel). Clearly, it was better that Cindy Crawford was a model than become a chemical engineer. Being a chemical engineer might have lead to good money, but Cindy’s comparative advantage was modeling. Economics studies how people can take their comparative advantages and use those advantages. Let's assume Cindy was better than most at chemical engineering, but let’s also assume she was much better at super modeling. Cindy should become a supermodel because that is her core competency and since she is better at this than chemical engineering it would make sense for her to become a supermodel rather than become a chemical engineer.

Sowell (September 15, 1995)

Thomas Sowell on C-Span on September 15, 1995