Fox runs with discredited theory in its assault on unemployment insurance
Research ››› ››› JUSTIN BERRIER
On Fox & Friends, Fox Business anchor Stuart Varney continued attacking unemployment insurance, by seizing on a recent Wall Street Journal op-ed by Harvard economist Robert Barro, which claimed that unemployment rates would have been at 6.8% had Congress not extended unemployment benefits. But Barro's theory and similar claims -- that extending unemployment benefits in the current recession provide a disincentive for people to find work -- have been widely disputed by experts.
Varney cites WSJ op-ed in continued attack on unemployment insurance
Varney seizes on WSJ op-ed to claim that "unemployment would be at 6.8%, not the 9.5%," if Congress hadn't "extended unemployment benefits." On the August 31 edition of Fox News' Fox & Friends, Varney cited a Wall Street Journal op-ed by Harvard economics professor and Hoover Institute senior fellow Robert Barro to claim that, in Varney's words, "If we had not extended unemployment benefits to 99 weeks from the standard 26 weeks, [Barro] says, unemployment would be at 6.8%, not the 9.5%." According to Varney, Barro argued that "you extend benefits like this and it discourages people from going out to look for work especially, you know, the start of the benefit period because it's nearly two years."
Barro looked at unemployment data from 1982, compared it to current recession, and theorized that if unemployment benefits hadn't been extended, "the unemployment rate would have been 6.8%." In his column, Barro argued that "although the peak unemployment rate (thus far) of 10.1% in October 2009 is very disturbing, the rate was even higher in the 1982 recession (10.8% in November-December 1982). Thus, there is no reason to think that the United States is in a new world in which incentives provided by more generous unemployment-insurance programs do not matter much for unemployment." He then compared the 1982 "peak unemployment rate" to the current recession and concluded that "[t]he dramatic expansion of unemployment insurance eligibility to 99 weeks" caused the current unemployment rates to remain high. Without this extension, he argued, "the unemployment rate would have been 6.8% rather than 9.5%." From his column:
To begin with a historical perspective, in the 1982 recession the peak unemployment rate of 10.8% in November-December 1982 corresponded to a mean duration of unemployment of 17.6 weeks and a share of long-term unemployment (those unemployed more than 26 weeks) of 20.4%. Long-term unemployment peaked later, in July 1983, when the unemployment rate had fallen to 9.4%. At that point, the mean duration of unemployment reached 21.2 weeks and the share of long-term unemployment was 24.5%. These numbers are the highest observed in the post-World War II period until recently. Thus, we can think of previous recessions (including those in 2001, 1990-91 and before 1982) as featuring a mean duration of unemployment of less than 21 weeks and a share of long-term unemployment of less than 25%.
These numbers provide a stark contrast with joblessness today. The peak unemployment rate of 10.1% in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36%. The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2%. These numbers are way above the ceilings of 21 weeks and 25% share applicable to previous post-World War II recessions. The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.
To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and--I assume--the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.
Barro's claim and claims like his have been widely disputed by experts
Business Insider: Barro's argument is "really, really thin," in part because, "in 1984 we weren't coming off a massive multi-year bubble." In an August 30 Business Insider article, Joe Weisenthal wrote:
Harvard economist Robert Barro is out with a new piece arguing that if Obama hadn't extended unemployment benefits, we'd be at 6.8% unemployment and not 9.5%.
How does he arrive at this number? Simple, he just presumes for no reason that the nature of the recent jobless spike is no different than the one seen in the early 80s.
(An examination of unemployment in the early 80s vs. right now was made recently by David Leonhardt in the NYT. He noted that in 1982, 22% of the population experienced joblessness, whereas this time that peaked at 16%).
So anyway Barro just says: Well, unemployment fell fast in the early 80s, when we had a shorter period of being able to collect benefits, ergo, it should be the same now.
This is really, really thin, because it presumes that the different lengths of being able to collect unemployment-insurance is the defining difference between now and then. But in 1982 we weren't coming off a massive multi-year bubble. And we're not merely in a post-burst era -- home values are still going down, and construction is at something of a standstill, which means this is an active drag on the economy.
Housing is just one difference, but as this chart from Calculated Risk -- which compares housing starts and employment -- reminds us, it's a powerful predictor of jobs. And sure, it's probably not the only issue, but Barro could at least try to argue why this is not a relevant factor to consider before decrying the jobless benefits that can represent the last barrier between joblessness and total devastation for many families.
Robert Reich: "Anyone who bothered to step into the real world would see the absurdity of Barro's position." In an August 30 post, University of California Berkley professor Robert Reich wrote:
The economy is so bad that the social fabric is coming undone, and what used to be merely weird economic theories have become debatable public policies. Tonight it was Harvard Professor Robert Barro, who opined in today's Wall Street Journal that America's high rate of long-term unemployment is the consequence rather than the cause of today's extended unemployment insurance benefits.
In point of fact, most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared. Indeed, fewer than 40 percent of the unemployed in most states are even eligible for benefits, because states require applicants have been in full-time jobs for at least three to five years. This often rules out a majority of those who are jobless - because they've moved from job to job, or have held a number of part-time jobs.
So it's hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work.
Anyone who bothered to step into the real world would see the absurdity of Barro's position. Right now, there are roughly five applicants for every job opening in America. If the job requires relatively few skills, hundreds of applicants line up for it. The Bureau of Labor Statistics says 15 percent of people without college degrees are jobless today; that's not counting large numbers too discouraged even to look for work.
Barro's son, Josh Barro: In today's economy, "UI extensions should do less to foster unemployment," due to the high number of job seekers. In a July 27 National Review article, Robert Barro's son, Josh Barro, rebutted recent studies which suggested that unemployment insurance increased unemployment rates, writing, "Two Fed studies suggest that they may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large." Barro pointed out that:
[T]oday, there are more than 4 unemployed members of the workforce per job opening. Even if a significant number of unemployed people who are nominally in the workforce actually prefer to stay unemployed, other job seekers will easily fill those available slots. As such, UI extensions should do less to foster unemployment when the economy is weak than when it is strong.
Krugman: Charge that extending benefits makes unemployment worse during a recession is "dead wrong." In a July 4 op-ed, Nobel Prize-winning economist Paul Krugman wrote that some "honestly misinformed" people "who believe, for example ... that extending benefits would make unemployment worse" hold a belief that is "dead wrong." Krugman explains that although "it's a real effect when the economy is doing well ... it's an effect that is completely irrelevant to our current situation" because there are fewer available jobs. According to Krugman:
When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise. But as you may have noticed, right now the economy isn't booming -- again, there are five unemployed workers for every job opening. Cutting off benefits to the unemployed will make them even more desperate for work -- but they can't take jobs that aren't there.
Labor economist Lawrence Katz says possibility of unemployment benefits extending joblessness isn't currently a concern due to the scarcity of jobs. In an August 2009 New York Times article, Harvard labor economist Lawrence Katz said that the claim that unemployment benefits prolong unemployment "should not be a concern now because jobs remain so scarce." From the Times article:
Traditionally, many economists have been leery of prolonged unemployment benefits because they can reduce the incentive to seek work. But that should not be a concern now because jobs remain so scarce, said Lawrence Katz, a labor economist at Harvard.
For every job that becomes available, about six people are looking, Dr. Katz said. "Unemployment insurance gives income to families who are really suffering and can't find work even if they are hustling to look," he said.
With the economy still listing, he added, a temporary extension can provide a quick fiscal stimulus. And, Dr. Katz said, when people exhaust unemployment and health insurance, many end up applying for disability benefits, which become a large, unending drain on the Treasury.
In a July 15 USA Today article, Katz also warned against comparing unemployment date "from the 70s and 80s" to today, by noting that the "old findings were distorted":
Research from the 1970s and '80s found that about a third of unemployed workers took jobs as soon as their unemployment benefits ran out. But Harvard economist Lawrence Katz has said the old findings were distorted because factories often timed temporary layoffs so they could bring employees back to work when their checks ran out.
MarketWatch chief economist Irwin Kellner: "[T]here are now more than five applicants for every job. Clearly, this is not caused by more benefit checks." In a July 13 MarketWatch op-ed, chief economist Irwin Kellner wrote:
To the extent that duration of unemployment and benefit checks move together, it is a spurious correlation, like electric motors and school grades. Both may appear to correlate, but in actuality they are related to something else.
In the case of the duration of unemployment and number of benefit checks, both are really determined by the lousy economy!
Specifically, I am referring to the after-effects of the bursting of the housing bubble, the financial crisis and technological change, which resulted in the worst recession in 70 years and the highest overall jobless rate since the 1930s.
As a consequence there are now more than five applicants for every job. Clearly, this is not caused by more benefit checks.
Washington Post: Unemployment benefits are "probably not discouraging many people from accepting available work," because in "reality ... jobs [are] scarce." A July 13 Washington Post editorial also pointed out that low job openings make the argument that unemployment benefits keep workers from finding jobs irrelevant: "In theory, longer periods for drawing benefits reduce recipients' incentives to find work. In the current reality, with jobs scarce and unemployment benefits hardly lavish, the program is probably not discouraging many people from accepting available work."
Alan Greenspan: "When you're in a period of job weakness ... then obviously you want to be temporarily generous." In 2003, former Federal Reserve chairman Alan Greenspan said to the Joint Economic Committee:
Unemployment insurance is essentially restrictive because it's been our perception that we don't want to create incentives for people not to take jobs. But when you're in a period of job weakness, where it is not a choice on the part of people whether they're employed or unemployed, then obviously you want to be temporarily generous. We ought to be temporarily generous.
And I think that's what we have done in the past and it has worked well.
I think that because it is stringent in normal periods, that one should recognize that people who lose jobs not because they did anything and can't find new ones, you have a different form of problem, which means that you have to allow the unemployment system to be much broader and, indeed, that's what we need to do.
Economists agree that unemployment insurance has strong stimulative effect on GDP, employment
Krugman: "Aid to the unemployed creates jobs quickly." In his July 4 op-ed, Krugman wrote:
One main reason there aren't enough jobs right now is weak consumer demand. Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending. That's why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus. And unlike, say, large infrastructure projects, aid to the unemployed creates jobs quickly -- while allowing that aid to lapse, which is what is happening right now, is a recipe for even weaker job growth, not in the distant future but over the next few months.
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."