House Speaker Nancy Pelosi was recently quoted as saying, “Unemployment insurance. . .is one of the biggest stimuluses to our economy…it injects demand into the economy…it creates jobs faster than almost any other initiative you can name…it is a job creator. . .and for those reasons should be passed.” (See the YouTube clip)
Is this true? Unfortunately, MS Pelosi offers no reasons for believing it to be true. I can think of many that it is not.
In order to assess the truthfulness (or falsehood) of the proposition that unemployment compensation is stimulative, we need, as with any economic proposition, to determine not only its immediate effects, but also its more remote. While it is certainly true that any money receved by those who have none will be spent almost immediately upon goods and services (thus ‘stimulating’ the economy), we must ultimately inquire where this money comes from, who pays it or from whom it is taken. Let’s first consider unemployment compensation more abstractly.
There exist only seven ways to pay for the compensation checks sent to the unemployed.
1. Each employed person can save a portion of his wage or salary in some form of savings account during the years that he is employed that he may draw upon during periods of unemployment. By saving as little as 5% of his salary/wage, and given the power of compounding interest, he will have saved enough money in seven years to supply him with six month’s worth of income. At this rate, should he never have to draw from it during a full life of work, even if he make but minimum wage his entire working life, he will have accumulated $180,000 at a modest return of 5%.
2. He can purchase unemployment insurance from a commercial carrier, the cost whereof will be a little greater and the benefit a little less than in 1 above because of administrative and actuarial costs.
3. His employer can purchase unemployment insurance for him (i.e., on his behalf, in his name). Most employers, however, will hedge in such accounts with a multitude of restrictions, some reasonable and some less so, in order to reduce their costs.
4. His neighbors can voluntarily pay him his former salary (or, at least, a significant portion of it) while he is unemployed. This is a good system; it eliminates waste and fraud and encourages the unemployed to secure re-employment.
5. He can steal from his neighbors enough money to sustain him ’til he secure re-employment. Of course, if he get caught and incarcerated for doing so, his unemployment problem will have been solved: in a perfect world, he will be crushing rocks with a sledgehammer during the heat of the day, or digging ditches and refilling them, while spending his evenings in a suitably dark and doleful dungeon devoid of libraries, television, recreation rooms, etc.
6. The government can pay his unemployment benefits. This is not a good system because it scarcely differs from 5 above and allows the unemployed to sit on his derriere at home all day at others’ expense. Moreover, like any governmental (bureaucratic) system, waste and fraud are encouraged and, under such a system as this, there is little incentive for the unemployed to secure re-employment.
7. He can plant enough money trees in his back yard to supply all the money he needs. Since trees, once planted, require very little care, he can still spend most of his time as in 6 above.
In the United States, unemployment compensation is part of the Social Security System. Each state is required to establish its own system. Employers are taxed by both state and federal governments, though the states are the collectors for the feds. The conditions under which the unemployed are qualified to receive compensation and the amounts payed vary from state to state. But the states never collect enough to supply their needs even in periods of relatively low unemployment. Naturally, it falls to the federal government to supply the lack as they usually will when Democrats are in power.
This is the matter MS Pelosi was addressing. The federal government can pay for this program by either one or a combination of the following means.
1. Increase taxes. Doing this will take money from some and give it to others. What the others will spend (stimulating the economy) the will not be able to spend (destimulating the economy). The net effect, because of administrative (bureaucratic) costs, waste, fraud, mismanagement, etc., is to destimulate the economy.
2. Borrow the money. This will stimulate the economy today, for our generation, at the expense of destimulating the economy later for succeeding generations when they finally have to pay for it by paying more taxes thus having less to spend.
3. Print the money. This will destimulate the economy both now and later. More money for the same bunch of goods means higher prices for everyone which destimulates the economy.
Only under plan 2 above, will the economy be stimulated now, though at a heavy price later.
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