President Barack Obama has made extending unemployment benefits his #1 policy priority for 2014, in service of his attack on inequality. It is a theme that served him well in his 2012 re-election campaign. Republicans are responding by demanding budget cuts to offset the additional spending that extended unemployment benefits would require. Both sides are missing the key empirical point: longer benefits lead to higher unemployment.
That point was made by economist Robert Barro back in 2010, when he calculated that the extraordinary step of extending unemployment benefits to 99 weeks, rather than a more modest 39 weeks, had kept unemployment 2.7% higher than it would otherwise have been. The reason? Incentives matter. People are more likely to seek jobs, or to start their own businesses, when they know that they can only collect unemployment for a short time.
Democrats, and the Obama administration, argue that because the average time of unemployment has been far longer during this recession/recovery than in most, longer unemployment benefits are needed. Yet they mistake the cause of longer unemployment for the remedy. In fact, Barro pointed out, longer benefits actually subsidize unemployment–which is why Europe, with its generous benefits, has suffered a chronically high jobless rate.
The White House plans to sell its proposal by highlighting the sorrowful stories of those who have been out of work for months on end and who stand to lose their only source of income. Democrats are even arguing that cutting back benefits would cost jobs by reducing consumer spending. The truth is exactly the opposite–which is why GOP willingness to accept extended benefits if they are paid for is politically and morally inadequate.
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