Originally posted on August 25, 2010 on FreedomWorks’ website.
Last month, Speaker of the House Nancy Pelosi claimed that unemployment benefits “creates jobs faster than almost any other initiative you can name.” PolitiZoid has created an animated video of Nancy Pelosi’s foolish speech on the “stimulus” of unemployment benefits.
Following Nancy Pelosi’s logic, she should be thrilled to hear that the number of first-time filers for unemployment insurance rose to 500,000 last week—the highest in nine months. However, paying more people not to work will not stimulate the economy or create any jobs. As Arthur Laffer explainsin his Wall Street Journal column,
The flaw in their logic is that when it comes to higher unemployment benefits or any other stimulus spending, the resources given to the unemployed have to be taken from someone else….While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.
Unlike the private sector, government is unable to foster economic growth since it does not have any wealth of its own. Nancy Pelosi who claimed that “we could slip back and have another recession” if Congress didn’t pass an unpaid $34 billion unemployment insurance bill, fails to acknowledge the danger of excessive unemployment benefits.
Currently, unemployed American workers can generally collect unemployment benefits for up to 99 weeks—about 2 years. But how much further is Nancy Pelosi willing to extend these unemployment benefits? At what point is enough, enough?
Naturally, humans respond to incentives. As a result of excessive unemployment benefits, people may not be as proactive about searching for jobs or may become pickier on which they jobs they accept. Even White House economic adviser Larry Summers acknowledges that excessive unemployment insurances will increase the long-term jobless:
Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months.
Take for example Denmark whose citizens use to collect unemployment benefits for up to four years. Of course, being laid off from a job is terrible news. Although, it sure lessens the blow to know that the nanny state will provide you generous unemployment benefits for the next four years of your life.
However, in June, Denmark’s government due to a budget crisis revealed that they would be cutting unemployment benefits back to 2 years. Denmark’s unemployment chart below shows how responsive people were to the changes in unemployment benefits:
According to the New York Times,
It shows that between 2005-7, the number of people who got jobs during their four years of benefits — the green line – rose at the beginning before dropping sharply, then spiked as benefits were about to run out, only to plummet after. The red line shows similar behavior in 1998, when Denmark’s benefit period was five years.
Steen Bocian, a chief economist at Danske Bank, asserts that:
it shows that people are not seeking all the jobs they could get, but just the jobs they would like to have.
As expected, Speaker of the House Nancy Pelosi irrationally believes that paying people not to work somehow creates jobs. As shown in Denmark, excessive unemployment benefits give people less incentives to actively search for a job. Be on the lookout for Nancy Pelosi to pass yet another deficit increasing unemployment insurance extension during a Lame Duck Session that will add billions our unsustainable national debt while not creating net new jobs.