UPDATED: Pelosi was right: Economists say unemployment insurance stimulates the economy

Right-wing media have attacked House Speaker Nancy Pelosi for her statement that unemployment insurance stimulates the economy and creates jobs, calling her remarks “laughable” and “lunacy.” In fact, economists agree that extending unemployment insurance has a strong stimulative effect on GDP and employment during a recession.

Pelosi: Unemployment insurance “injects demand into the economy,” “is a job creator”

From Pelosi's July 1 news conference: (accessed via Nexis)

PELOSI: When the economy turns down, there is a compact that we have that there is unemployment insurance for those who, through no fault of their own, lose their job, and we owe them that. It is a safety net, not just for those individuals but for our whole system, our whole system. It goes in cycles.

I think we further have to address the fact that we need to create many, many more jobs so that people's economic existence is not so dependent on cycles.


Now, let me say about unemployment insurance, we talk about it as a safety net and the rest. This is one of the biggest stimuluses to our economy. Economists will tell you this money is spent quickly. It injects demand into the economy, and is job creating. It creates jobs faster than almost any other initiative you can name because, again, it is money that is needed for families to survive, and it is spent. So it has a double benefit. It helps those who have lost their jobs, but it also is a job creator. And for that reason, for those two reasons, at least, it should be passed, and I am optimistic that it will.

It is impossible to think of a situation where we would have a country that would say we are not going to have unemployment benefits and that the only people who want them are people who don't want jobs. That is just so contrary to what our country is about, and I reject that misrepresentation of the motivation for people to be on unemployment insurance.

Right-wing media incredulous that Pelosi said unemployment benefits create jobs

Hot Air: Pelosi's statements were “laughable” and “provably incorrect.” In a July 2 post, blogger Ed Morrissey wrote that “the laughable notion from Nancy Pelosi that jobless benefits provide the biggest possible stimulus to the economy that Congress can create” is “both ridiculous and provably incorrect.”

Powers: “Lunacy of this magnitude is known as a 'cry for help.' ” In a July 1 post on Michelle Malkin's blog, guest blogger Doug Powers wrote that Pelosi “is around the bend even more than usual these days.” Powers posted some of Pelosi's comments, then wrote: “In the real world, demonstrating lunacy of this magnitude is known as a 'cry for help' and an intervention involving large nets, straight-jackets and electric shock therapy is in order. But not in Washington, DC, where free-range crazies are allowed to pick pockets, loot futures, and all too often get re-elected.”

Fox & Friends doesn't understand the “logic” behind Pelosi's statement that unemployment benefits are stimulative. On the July 2 edition of Fox News' Fox & Friends, co-host Alisyn Camerota, before playing Pelosi's comments, called them “curious” and said it was “hard to parse the logic” of them." After playing the clip, co-host Clayton Morris said, “I would love to know what economists say that.” Camerota focused on Pelosi's statement that unemployment benefits are a “job creator” and asked, “How is it a job creator?” Co-host Dave Briggs said there were a “few holes in that logic to say the least.”

Gateway Pundit: “This may help explain why the national unemployment rate went from 4.6% to 9.7%.” Jim Hoft, on Gateway Pundit, wrote of Pelosi's remarks: “This may help explain why the national unemployment rate went from 4.6% to 9.7% since she took over as Speaker of the House.”

Freddoso: “If only we had higher unemployment -- then we could create even more jobs!” In a July 1 Washington Examiner op-ed, David Freddoso wrote: “I hear Nancy Pelosi speak, and all around me I can envision a bustling service sector sprouting up, creating new jobs to serve all of the Americans who are receiving their $425/week in unemployment benefits.” He added, “If only we had higher unemployment -- then we could create even more jobs!”

LVRJ's Frederick: “What? Unemployment checks create jobs?” In a July 1 Las Vegas Review-Journal blog post, Sherman Frederick posted video of Pelosi's comments and wrote: “If you have half a brain and have not drunk the Obama/Pelosi/Reid Kool-Aid you'll need to view this clip to believe it.”

Easton mocks Pelosi's comments as “an interesting look at economic policy.” During the July 4 edition of Fox News Sunday, asked whether Pelosi's statements were accurate, Fortune Washington bureau chief Nina Easton said, “Well, that was an interesting look at economic policy. No.” She then laughed.

Economists agree that unemployment insurance has strong stimulative effect on GDP, employment

CBO scores “increasing aid to the unemployed” as the highest-scoring policy proposal to stimulate economy. In a January 14 report on “Policies for Increasing Economic Growth and Employment in 2010 and 2011,” the nonpartisan Congressional Budget Office (CBO) stated:

Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or increasing aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011.

According to a table in the report, CBO estimated that increasing aid to the unemployed would have the greatest effects on GDP per dollar of budgetary cost and the second highest cumulative effect on employment of the policy options considered.


Elmendorf: Policies such as unemployment insurance “have a significant impact on GDP.” In January 2009, CBO director Douglas Elmendorf testified:

Transfers to persons (for example, unemployment insurance and nutrition assistance) would also have a significant impact on GDP. Because a large amount of such spending can occur quickly, transfers would have a significant impact on GDP by early 2010. Transfers also include refundable tax credits, which have an impact similar to that of a temporary tax cut.

A dollar's worth of a temporary tax cut would have a smaller effect on GDP than a dollar's worth of direct purchases or transfers, because a significant share of the tax cut would probably be saved. The nonbusiness tax cuts in H.R. 1 would reduce revenues much more in calendar year 2010 than in calendar year 2009 because much of the reduction in taxes would be realized by households when they filed their returns in 2010.

Zandi estimated that extending unemployment insurance benefits provides significant stimulus. In his July 24, 2008, House testimony, Mark Zandi, Moody's Economy.com chief economist and a former adviser to John McCain, rated “Fiscal Economic Bank for the Buck,” defined as “One year $ change in real GDP for a given $ reduction in federal tax revenue or increase in spending.” “Extending UI Benefits” was the second-highest of 13 policy options, behind “Temporary Increase in Food Stamps.” The Economic Policy Institute created the following graphic based on Zandi's figures:


Center on Budget and Policy Priorities: “The money gets spent fast and its effects spread through the economy.” From an April 16 Center on Budget and Policy Priorities document:

Temporary increases in unemployment insurance benefits score high in “bang-for-the-buck” calculations of their economic impact as stimulus. The money gets spent fast and its effects spread through the economy. As a result of such policies, local businesses are less apt to lay off workers and cut back on orders from their suppliers during a downturn; and in the early stages of a recovery, they are more apt to hire additional workers and step up their orders. Policymakers have always ended these emergency UI benefits once a strong and sustainable economic recovery is underway.

Joseph Stiglitz: Stimulus “should begin by strengthening the unemployment insurance system.” In a January 23, 2008, op-ed, Nobel laureate Joseph Stiglitz wrote that “America's economy is headed for a major slowdown” and that "[t]he country needs stimulus." Proceeding to describe the “optimal package,” Stiglitz recommended: “We should begin by strengthening the unemployment insurance system, because money received by the unemployed would be spent immediately.”

Blinder: “Extending unemployment benefits is one of the best forms of stimulus we know.” On July 2, NPR reported that former vice chairman of the Federal Reserve and Clinton economic adviser Alan Blinder “supports the effort to extend expiring unemployment benefits.” NPR quoted Blinder as saying: “Extending unemployment benefits is one of the best forms of stimulus we know.”

Martire: Stimulus from unemployment benefits “greater than any other fiscal action government can take.” In a June 30 piece in the State Journal-Register of Springfield, Illinois, Center for Tax and Budget Accountability Executive Director Ralph Martire wrote:

As for the contention that extending UI encourages people to avoid finding jobs so they can stay on the public dole -- well, it's just plain goofy. In May 2010, the private sector created only 41,000 jobs. That's 72,000 less than what's needed to keep up with the demand generated by natural work-force growth, much less creating the positions needed for the unemployed to find work. No one's thumbing a nose at getting hired to live in luxury eating government cheese -- there simply are no private sector jobs available.

Perhaps the hawks have forgotten that consumer spending accounts for more than two-thirds of the nation's economy. The best consumers are low- and middle-income folks, who don't earn enough to save, so they spend their paychecks. That is, when they have paychecks. See, if they've lost their jobs and the private sector isn't creating jobs and the feds cut off unemployment benefits, their ability to spend drops to, well, nil. Which is why the amount of private sector economic activity stimulated by unemployment benefits is greater than any other fiscal action government can take. In fact, dollar-for-dollar, it's five times more stimulative than the Bush tax cuts.

Sure, the long-term deficit has to be dealt with -- but honestly and responsibly. Short-term, deficit spending -- particularly on things like unemployment insurance, food stamps, housing assistance and the like -- is creating jobs and saving the U.S. economy from disaster.

EPI's Mishel explains why unemployment insurance is “such good stimulus.” In a June 10 hearing before the House Ways and Means Income Security and Family Support Subcommittee, the Economic Policy Institute's Lawrence Mishel testifed:

As I have explained, the only real option for increasing economic activity and consumer demand for goods and services is federal government intervention in the economy, specifically through more deficit spending. The safety net programs are a vital part of this picture.


The reason extending unemployment insurance is such good stimulus is that it gets money to people who are the most likely to have depleted their savings and thus tend to have no choice but to quickly spend essentially every dollar they receive on necessities found in their local economy. In other words, virtually every dollar spent on extending unemployment insurance benefits goes directly, and immediately, toward the purchase of local goods and services, providing an extremely efficient demand boost. Not only is extending and expanding UI benefits the right thing to do for the people hurt most by this economic downturn, it is also excellent economic policy.

CEPR's Schmitt: Unemployment insurance helps “sustain a community.” In an April 28 article, McClatchy Newspapers reported:

And allowing workers to fall off the unemployment insurance rolls can have negative ripple effects, said John Schmitt, senior economist with the Center for Economic and Policy Research.

“It hits individuals hard, but it also hits their communities, and more broadly the country,” Schmitt said. “Having unemployment insurance benefits can help sustain a community through a very difficult time.”

Fox correspondent agreed with Pelosi that in economic downturn, unemployment insurance “is a job creator”

Garrett: Unemployment insurance is “a job creator when there are no other job creators out there.” In a later segment on Fox & Friends, Camerota asked Fox News senior White House correspondent Major Garrett, "[Pelosi]'s basically saying it injects cash into the economy. That is true. But it's a job creator?" Garrett responded:

GARRETT: It's a job creator when there are no other job creators out there. ... When you have a climate where pervasive attitude among potential job hirers, meaning employers, is that we're just going to hold pat, then you really have nothing else to do to fuel the economy other than provide stimulus. And if you give cash to unemployed workers, at least that's cash they can spend in their local economy. So from that limited perspective, if you have no other alternatives and no one is hiring, or hiring is very, very low or slack, then unemployment benefits do provide ready cash at the local merchants to keep those businesses afloat.

Easton mocks Pelosi's comments as “an interesting look at economic policy.” During the July 4 edition of Fox News Sunday, asked whether Pelosi's statements were accurate, Fortune Washington bureau chief Nina Easton said, “Well, that was an interesting look at economic policy. No.” She then laughed.