As I speak, approximately 1.3 million of the long-term unemployed have exhausted their benefits --- they now receive nothing to bolster their spending. To some, this is an outrageous betrayal of the fundamental decency that is at the core of the best of America’s moral traditions. To others, it is about time the unemployed stopped being subsidized in their idleness – cutting off benefits, so the argument goes, will make them try harder to find a job.
We can debate the morality of unemployment insurance till doomsday without swaying any of the opinions on the other side. Philosophers believe it is possible to “convince” people about moral issues. For most of us, however, you either believe something is moral or you don’t.
Therefore, I want to focus on something factual -- the fact that people who have jobs actually benefit when the government makes unemployment insurance payments to the unemployed. At first glance, it would seem that people who have jobs are not harmed when someone else loses a job nor helped when unemployed individuals get money from the government. However, that first thought is dead wrong.
In an economy such as ours, where one’s standard of living depends on the income one receives -- spending by other people is the key to that income. Thus, every increase in income for anybody --- potentially raises everyone else’s standard of living. Similarly, every decrease in income potentially erodes everyone else’s standard of living. My reasoning is based on a concept known as aggregate demand.
Aggregate demand is nothing more than the purchasing of goods and services by every economic actor – whether it be individuals like you and me buying food or a business buying new machines or the government hiring air traffic controllers. (In economics language, total demand is the sum of Consumption by individuals, Investment by businesses, and purchases of goods and services by Government – in most textbooks this is summarized algebraically by C + I + G.) Every dollar spent by these economic actors is income for someone somewhere in the economy.
(In reality this has to be qualified because spending on foreign-made goods raises incomes overseas. If Americans spend more overseas than foreigners spend here, we have a trade deficit and the trade deficit actually reduces domestic aggregate demand.)
IF there is more unemployment this year than last year, chances are that spending will grow more slowly this year than last year and your income will most likely be affected even if you do not actually lose your job. You may get less overtime. You may not get a raise. If you are a government employee, your city or state may have less revenue and the result will be that they might freeze your salary even if you don’t get laid off.
When government increases the amount of money it pays to the unemployed, that plays a role in allowing the unemployed to keep spending – thereby cushioning the fall in aggregate demand that caused the rise in unemployment in the first place. This last point is very important. When the economy falls into a recession it is because aggregate demand has fallen. When an economy grows slowly out of a recession (such as has occurred since 2009) it is because aggregate demand is slowly growing. The rise in unemployment expenditures by government moderates the downward pressure on the standard of living of the rest of us.
When the unemployed receive these payments, businesses that cater to current consumption – restaurants, groceries, gas stations to name some – will not have to cut back production (or not go out of business) if their customers who have lost their jobs continue to have income coming in. In short, when government spends money on the unemployed that gets translated into spending BY the unemployed – which in turn translates into rising (or at least stable) incomes for the rest of us.
(Many research economists have noted that the impact of government payments to the unemployed is quite substantial in terms of the amount of extra spending stimulated. This is only logical – the unemployed usually spend every penny they receive trying to maintain their previous standard of living.)
When the long term unemployed lost their benefits that represented a decline in overall spending in the economy. True, in a multi-trillion dollar economy with scores of millions of spenders, 1.3 million people is a small percentage. However, during this painfully slow recovery from the Great Recession of 2008-2009 every little roadblock on the road to recovery is painful and should be avoided not embraced.
This brings me to my final point. The statement that cutting unemployment benefits will encourage people to try harder for jobs is based on the erroneous idea that there are plenty of jobs out there if the unemployed will only try harder to find them. Senator Rand Paul of Kentucky made this argument explicitly on national television. This is absolute nonsense. For it to be true we would have to argue that for some strange reason, since 2009, more and more of the unemployed perversely decided to stop looking for work. A much more logical explanation for the rise in unemployment is the sluggish growth in aggregate demand.
Another inconvenient fact for those making the argument is that there are 3 applicants for every open job. Cutting unemployment benefits will decrease aggregate demand and create more applicants for every job while reducing the number of jobs created.
The day before this commentary was delivered, it was reported that the US Senate is planning to “fast track” a 3 month extension of unemployment insurance for the long-term unemployed. The vote might come as early as Tuesday or Wednesday of the week of Jan 6. Anyone reading this ought to call their senators and representatives to support this extension. Not only would it be immoral for Congress to leave things the way they are, but it would harm the economy.
Michael Meeropol is visiting professor of Economics at John Jay College of Criminal Justice of the City University of New York. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.
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