Tuesday, October 14, 2008

One Crisis Begats Another

Unemployment rates have been rising, which is unfortunate. I have lost my job before and I think that these people should do exactly like I did. Namely, mail out dozens of resumes, make phone calls, send e-mails, contact recruiters, and start looking at other cities where you might consider work. My wife was pregnant at the time, so I had a big incentive to quickly find another job. However, our unemployment insurance system eases the pain and lessens the incentive for many to quickly take another job.

Here in the United States we get a small percentage (bigger if you don't make much) of our previous salary for 26 weeks. Every week you have to file information showing that you applied for a certain number of jobs. In Germany, they have had an unemployment insurance system that paid 80% of previous salary for 2 years. They required no evidence that re-employment was being pursued by the recipient of funds. Not too surprisingly, America's unemployment rate hovers around 5%, while Germany's unemployment rate hovered around 9 or 10%.

Now, Barack Obama and Nancy Pelosi have both suggested that we extend unemployment benenfits and temporarily eliminate income tax on those benefits. CBS News quotes Obama as saying "we should extend expiring unemployment benefits to those Americans who've lost their jobs and can't find new ones." This summer, the Democrats added a rider to an Iraq War Funding bill that extended unemployment benefits by 13 weeks to a total of 39. Now, Obama is asking for an additional 13 weeks. What do you suppose will happen if we extend unemployment benefits? Higher unemployment? You are correct.

John Lott, whom I've had the pleasure of conversing with a few times, has an op-ed at Investor's Business Daily writes about the effects of the first extension of unemployment benefits driving up unemployment:

Indeed, dozens of economic research papers predicted this outcome. When you extend or increase jobless benefits, you extend unemployment. If you set a date certain for getting rid of benefits, people find jobs. You get more of what you subsidize, and here we are subsidizing unemployment.


For the benefit hike that just took effect, these research papers imply a rise in unemployment to 6.4% from 5.5% in June. So, for the next month or two expect to see repeated bad news from labor markets. Perfect timing for the Democrats for the election.

Now, if unemployment rises another 0.9% to 7.3%, what do you suppose the Democrats will do at that point? Almost assuredly they will use the high unemployment rate as an excuse to expand government intervention in the economy. Their cure for the "unemployment crisis" will only exacerbate the situation and the failed results will be used to justify even more market distortions.

It's Crisis and Leviathan.

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