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Mark Thoma on the economic benefits of Unemployment Compensation

a little night musing's picture

Mark Thoma has two must-read articles up on the subject of the economic benefits of Unemployment Compensation and why extending benefits is an effective form of economic stimulus*.

Blogging at MoneyWatch, he gives a clear explanation of the multiplier effect of UC which can lead to job growth:

The claim that unemployment insurance cannot create jobs, or save them, is wrong. When people receive unemployment compensation, they spend the money at grocery stores, they buy clothing, they pay other bills, etc. The money spent at, say, grocery stores creates extra demand for food and other household items, demand that would not be there without the unemployment compensation payments. This increased demand for goods and services supports higher employment levels.

In addition, the money that the unemployed are able to spend at the store as a result of the payments they receive turns into the income of store employees and owners. The grocery store is able to support more employment and pay out more wages than otherwise, and these employees create even more demand when they spend their incomes at various stores around town, pay their own bills, etc. In addition, the store owner has higher profits, and when those are spend it generates even more demand which in turn supports higher employment.

And, of course, this doesn’t just happen at grocery stores. As the unemployment compensation is spent at various businesses, and respent as it moves from hand to hand, the entire community benefits. The benefits are not limited to helping just the individual receiving the payments.

And in an earlier piece, "The Importance of Automatic Stabilizers to the Economy", Thoma writes of UC along with other such transfer programs that tend to dampen economic cycles (making them have less extreme swings). He stresses the importance of putting effective stabilizing policy in place during calm economic times, to avoid our present situation of trying to pass them through Congress on the fly in the midst of crisis. He concludes:

Of course, the motivation for implementing new and improved stabilization policy will be lower during good economic times, we tend to forget and move on to other things. That’s why it’s important to begin the assessment of the automatic stabilizers we presently have in place right now, while the need for them is still fresh in our minds.

We need to do a careful and thorough assessment of the strengths and weaknesses of existing automatic stabilizers, to identify missing pieces and extraneous parts, and we need to design new stabilizers that can improve our ability to smooth fluctuations in the economy (e.g. payroll taxes that decline automatically when conditions deteriorate, investment tax credits that vary countercyclically, or a continuously updated list of infrastructure projects that can be started ahead of schedule or brought online anew if the economy goes into recession). Then we need to begin the difficult political process of getting the needed change through Congress and signed into law before the next crisis hits.

The lags in the effects of policy and the existing political atmosphere mean it’s too late to do much more to help the economy this time around, but we should be as prepared as we can the next time this happens.

Two very clear and useful reads.

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* In addition, of course, to their role in reducing human suffering and all that stuff.

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