The Bureau of Labor Statistics released new unemployment figures, which showed the nation’s unemployment rate fell to 9.5 percent in June, down two-tenths of a percent from May. If one isn’t familiar with the data, they would think that this is a good sign the economy is in recovery. Yet the fall was not due to an increase in jobs—the number of unemployed increased by 125,000 in June. The decrease in the rate was due to a larger number of individuals dropping out of the labor force, frustrated by the inability to land a job.
In response to the high unemployment rate, Speaker Nancy Pelosi advocated that the federal government lengthen unemployment benefits for those out of work. Her rationale is the unemployed will spend the money, increasing aggregate demand, which in turn will encourage employers to hire more workers.
There are a number of problems with her thinking. One is it does nothing to reduce unemployment. If it did, the nearly one trillion dollars in stimulus spending passed last year would have had done more to lower unemployment. Remember, the Obama administration stated that passing this stimulus package would limit the unemployment rate at 8 percent.
Second, there are jobs out there waiting to be filled. Roses Ammon, vice-president of a recruiting agency in Kansas City had an article in the Daily Caller complaining about unemployment benefits. She wrote that her agency has contacted many unemployed about job openings only to be told to call back when their unemployment benefits run out. Why would any rational person want to work when they can get paid not to get up every morning and fight rush-hour traffic? Extending unemployment benefits, as Speaker Pelosi suggests, only prolongs joblessness.
Second, this type of spending does nothing to help the economy. The Solow Growth Model, named after Nobel Prize winning economist Robert Solow, says that long-term economic is the result of higher savings and investment, creating capital accumulation and technological innovation.
The unemployed do not save their U.I. benefits and the areas of the economy where they spend their checks—food, clothing—doesn’t lend itself to long-term technological progress. All this additional spending does is increase deficits—i.e. reduces national savings. Higher spending today means higher taxes tomorrow to pay for this effort to increase short-term economic growth. Remember, Keynes theory of higher government spending in economic downturns was in an atmosphere of balanced budgets—not in situations of a national debt nearing one-hundred percent of GDP.
It would be one thing to advocate more unemployment benefits to help in the short-run if the Democrats (and Republicans in the first part of the decade) passed legislation to improve long-run economic growth. They have not. They passed health-care reform that does nothing but put additional burdens on employers, making them less likely to hire more. The financial reform bill passed by the House and waiting a Senate vote puts many new and unforeseeable restrictions on the flow of credit and investment in the United States—which will only lower economic growth.
This is the problem with having politicians intervene in economic policy. They are not concerned about growth rates five and ten years down the road—only what it will be on the next election day. As a result, the policies they pass only do harm to the very people they are supposedly trying to help.