Time to employ common sense

by John Hood, John Locke Foundation and NC SPIN panelist. December 30, 2013.

According to official government estimates, paying people not to work for extended periods of time is good for the economy, because it encourages consumer spending. This is an excellent reason why you should not take official government estimates all that seriously.

To concoct such fanciful models is to think like my children did in their pre-teen years. When it came to money, they knew only that it bought things they liked — cheeseburgers, candy, and computer games. If more was required, Dad just went to the bank and got some. Who put the money in the bank in the first place? Who cares?

As they start to earn their own money, and to understand what it takes for Dad to earn money, the boys see things a little differently. (Not a lot differently, mind you. They are still teenagers.) Given limited time and opportunity to earn, you can’t accumulate unlimited dollars. So if you buy one good with a dollar, you can’t buy something else with the same dollar.

Unemployment insurance is a transfer program. It moves money from some pockets (current taxpayers or bond buyers) into other pockets (recipients). Unless current taxpayers or bond buyers were going to use their cash to kindle their Yuletide fire, the result of extending unemployment insurance benefits can’t be a net increase in spending. Instead, current taxpayers will spend less on goods and services, and bond buyers will spend less on investments in other sectors of the economy.

President Obama, desperate to change the subject from health care, is trying to pressure Congress into extending federal UI benefits yet again. Not surprisingly, most Democrats and liberal activists are cheering him on. More surprisingly, some Republicans and conservative activists say they are open to the idea. Even more surprisingly, some are citing North Carolina’s recent experience as supporting Obama’s push for extended benefits.

Faced with a multi-billion-dollar debt in North Carolina’s UI program, the General Assembly enacted changes during the 2013 session to bring the state’s benefits more in line with competing states and thus reduce future debt-servicing costs. Under federal rules, that meant that as of July, North Carolina could no longer participate in extended federal benefits.

Critics predicted economic disaster. Some claim to see it now. But that’s not what the preliminary evidence shows.

From July to November, North Carolina employers added nearly 40,000 new jobs. Civilian employment, a different statistic derived from household rather than employer surveys, rose by 22,000. The state’s unemployment rate dropped by 1.4 percentage points, to 7.4 percent, while the national unemployment rate dropped by only 0.6 percentage points.

Critics point out, quite correctly, that North Carolina’s labor force also declined during the period, by about 10,000 persons a month. But they seem not to have noticed that the labor force was declining at a somewhat-faster rate, about 13,500 persons a month, before North Carolina exited the extended-benefits program.

There are two possible ways for extended benefits to elevate a state’s unemployment rate. One way is to keep recipients in the labor force who would retire, move, go back to school, or otherwise exit the program without an in-state job. The other way is to discourage recipients from taking in-state jobs they might not relish.

North Carolina’s unemployment rate has clearly fallen significantly since July. Liberals want to attribute the drop entirely to the first cause. But as Wells Fargo economist Mark Vitner points out in a new analysis, the second cause — people taking available jobs — appears to be having a larger effect on North Carolina’s numbers.

Congress should reject the president’s lobbying for extended benefits. Unemployment insurance was designed to provide temporary benefits for those who, through no action of their own, suddenly find themselves without employment or sufficient savings. It was never intended as open-ended income support. Lengthy spells of unemployment will tend to lead to retooling, retraining, or relocation as long as people aren’t presented with perverse incentives.

North Carolina isn’t a pariah when it comes to unemployment insurance policy. It is a leader.