Last week, Speaker of the House Nancy Pelosi (D. Ca.) told us, with a straight face, no less, that unemployment benefits create jobs. Anyone who frequents this blog knows that her comments make absolutely no sense. But, in a marvelous article in Thursday’s Wall Street Journal, Arthur Laffer explains not only why Ms. Pelosi’s statement is completely wrong, but also explains, in basic English, what the Obama administration should have done.
First, there is absolutely no economic stimulus from unemployment benefits. And, long term, it may actually harm economic growth. To demonstrate this, Mr. Laffer asks you to imagine an economy with only 2 workers, one of whom is employed, and one of whom is unemployed, and receiving unemployment benefits.
From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may ‘buy’ more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will ‘buy’ less. There is no stimulus for the economy.
Well, you may say, that example makes no sense because the money isn’t simultaneously taken out of the pocket of the employed, and, put in the pocket of the unemployed. But, the psychological impact is the same. The employed person knows that his taxes will have to rise to pay for the cost of the unemployment benefits, so, he spends less in order to be able to pay for the increased taxes down the road.
Let me add that I do not believe that we should have no unemployment benefits. But, Ms. Pelosi seems to believe the benefits should be extended indefinitely because they will create jobs. They will not. At best, we are only holding our own.
A better way…
Mr. Laffer tells us that between 2007 and now, we have spent $3.6 trillion (between Stimulus Part I, Stimulus Part II, the parts of the 2009 budget Bush vetoed, (aka, the Porkapalooza), and assorted other unemployment benefits extension bills, presumably to save or stimulate the economy.
Instead of spending that $3.6 trillion, Mr. Laffer says:
My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today?
Sounds like Reagan, doesn’t he? Maybe now, you understand “Reaganomics”, and why lowering taxes, not increasing government spending, is the only way to truly stimulate the economy.