Public Government Finance Research Paper

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Public/Government Finance

Public (Government) Finance

This essay examines the debate over extending unemployment benefits. The essay reviews the arguments in favor of and against further extensions, and the implications for economic and social policies. After exploring the alternatives, I make a recommendation and discuss means of measuring the success or failure of my recommendation.

The Apparent Problem/The Facts

Unemployment insurance is compensation that is provided to workers who become unemployed through no fault of their own. Unemployment provides compensation for a specific amount of time, or until a worker finds a new job. Regular unemployment provides benefits for up to 26 weeks, based on the number of weeks that the unemployed person worked in his or her claim year (Doyle, 2011).

Extended unemployment benefits provide compensation for a longer period of time, and are available for workers when they have exhausted regular state unemployment benefits during periods of high unemployment. In addition, the unemployed may be eligible for additional benefits funded by the federal government, including emergency unemployment compensation EUC). The state a person lives in and the date he or she became unemployed determine which benefits one is eligible for. EUC benefits are based upon the number of weeks of unemployment as well as the state unemployment rate (Doyle, 2011).

According to the U.S. Bureau of Labor Statistics, as of June 2011, the current unemployment rate stands at 9.2%, with the number of unemployed persons at 14.1 million. Another 2.7 million wanted and were available for work, but were not counted because they had not looked for work in the preceding 4 weeks, as defined by submission of unemployment claims (Bureau of Labor Statistics, 2011).

The context in which these historically unprecedented numbers are typically discussed is in comparison with the Great Depression. But such comparisons still do not give a complete picture of the urgency of the unemployment picture. CBS news reports that 6.2 million Americans have been jobless for more than six months -- the highest number since the Great Depression (Tracy, 2011). One-third of the unemployed have been jobless for more than one year. The number of people on Social Security disability has grown 17%, or 1.2 million people, since the start of the "Great Recession."

Initial unemployment benefits are paid by states for a period that usually lasts up to 26 weeks. These funds originate from employer taxes. Benefit levels are set and administered by each state and vary widely from state to state. (PRWeb, 2011b). Once the maximum amount of state assistance is exhausted, federal emergency extension funds kick in for a period up to 99 weeks. Over 1 million people have already exhausted their last federal unemployment extension (Unemployment Extension, 2011).

When Congress passed legislation extending unemployment benefits through 2011 due to record levels of unemployment, it caused many states to have to change their laws in order to make the extra benefits available to their residents. This in turn caused several state legislatures to debate extensively in attempts to accommodate special interest and other partisan political issues (PRWeb, 2011b).

The most recent unemployment extension allows for benefits up to a total of 99 weeks. However not all states passed legislation to accommodate all 99 weeks. Michigan became the first state to reduce the basic 26 weeks of unemployment benefits to 20 weeks for newly unemployed workers starting next year. Missouri cut back initial benefits to 20 weeks, starting immediately. Florida passed a law cutting maximum state benefits from 26 weeks to 23 weeks, with fewer benefits available when the jobless rate falls below 10.5%. Further, Florida could provide as little as 12 weeks of jobless benefits if unemployment falls to 5%. These states and others are attempting to manage the drain of state-paid unemployment benefits in order to balance the burden between the employers and the unemployed within the state and transfer the balance of the burden over to the extra benefits that the federal government provides (PRWeb, 2011b). In June 2011 President Obama authorized federal unemployment extension benefits for another 13 months, allowing eligible workers to continue to collect maximum benefits while trying to find a new job.

There are several arguments advanced against unemployment benefits extension. The single most often cited argument is that the U.S. simply cannot afford the cost of extended benefits. Another frequently cited argument is that extension of unemployment benefits does not promote economic recovery. Opponents also argue that unemployment extensions promote unemployment (Allmandblogs.com, 2010). They argue that extended benefits just discourage people from looking for work because they receive more money collecting unemployment than if they worked a 40-hour-per-week job (PRWeb, 2011).

In a similar vein, opponents of further extension of unemployment benefits argue that the benefits have to expire at some point, claiming that the country cannot afford to pay benefits forever. Approximately 30 states have borrowed more than $44 billion from the federal government to continue payments. This borrowing was required because of the sharp increase in the number of people who are unemployed, resulting in many states finding that they had drained their reservoir of funds dedicated to paying out benefits (PRWeb, 2011).

Tony Fratto, former assistant to President Bush, argues that extending benefits will adversely affect the unemployment rate, keeping it elevated longer than would otherwise be the case. He asserts that the longer benefits are available, the longer workers will take to find a job. Fratto also disregards claims that there is a significant economic stimulus impact when unemployment benefits are extended. In his words "Facing an uncertain future, people receiving benefits tend to spend only what they must and save or pay down debt with what's left over" (CNBC.com, 2009).

There are several arguments that support extending unemployment benefits. Few people disagree that that it is desirable to provide a minimum social safety net during times of extreme economic distress. Beyond that, there is little agreement on specifics of how to accomplish this goal. One benefit of extending unemployment benefits is the injection of unemployment dollars into the economy has a stimulative effect. A study by Moody's Analytics found that every dollar spent by the government on benefits for the unemployed produces and overall return of $1.61 for the economy. NPR discusses why other types of government spending are not nearly as effective. For example, every dollar of tax cuts for the wealthy injects only 32 cents into the economy. Economists argue that tax cuts for the wealthy tend to end up in savings; on the other hand, the unemployed tend to spend unemployment benefits on food, clothing, rent etc. The initial infusion of unemployment insurance benefits flows through the economy in a variety of ways, and the $1 of benefits is magnified (National Public Radio, 2010).

Also those who advocate extending unemployment benefits point out the error in Fratto's math regarding his claims about saving money and paying down debt using unemployment benefits. Given that unemployment pays only a fraction of what most people made while they were employed, all the debts and obligations that they incurred were based on having an income two, three, four times or more higher than their unemployment benefits. Simple math and common sense show that once they pay for rent or a mortgage, their car note, their health insurance that an employer formerly paid some portion of, food, gas, utilities and clothing, there is nothing left to save. Quite the opposite, statistics on increased credit card debt and increased borrowing against 401Ks would indicate that laid off workers experience a shortfall -- not a surplus -- while surviving off unemployment benefits.

The Choices

There are three choices that face Congress, state legislatures and ultimately the American people regarding the unemployment benefits dilemma. The first is to do nothing more, meaning leave benefits at current levels, no matter how high unemployment rises, nor how long the current economic downturn lasts. The second choice is to do more, that is extend benefits beyond 99 weeks, or to the chronically unemployed or to the underemployed; all of whom are currently not counted in the current unemployment rate of 9.2%. The third choice is to do less, that is, continue the trend developing in some states which effectively reduces the maximum 99 weeks of benefits allowed to a shorter period, or manipulate the other eligibility conditions.

The Real Problem

The real problem facing the nation is that there are too many unemployed individuals, too few jobs, and too few dollars available for unemployment benefits. Even during the best economic times there is competition for dollars to fund programs and policies; that competition grows exponentially during the type of economic stress that the country is now experiencing.

Recommendations

My recommendation is that we do nothing more than leave in place the current system of initial and extended benefits. Given that Americans are deeply divided over just what constitutes the most effective course of action, this is the more appropriate recommendation because it offers the most effective compromise. It should be noted that, in practical terms, this solution…[continue]

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