Unemployment Insurance Break Even Point Discussion

Started my morning off catching up on last night's The Conservative Wahoo Live. The discussion about extension of unemployment benefits reminded me of this recent post by Keith Hennessey on the subject that makes a lot sense to me. As CW knows, I have a pretty dim view of people in general. Nevertheless, I can't bring myself to believe that the extension of this benefit is going to compel that many people to slough off finding a job to spend it trying to look like Dr. Jeff Life or otherwise. Mr. Hennessey suggests that at the current level of unemployment, while there are surely people snowbirding it, there are still enough people who truly need it to make the extension warranted. He does go on to say that below a certain percentage - in his mind 8% - the tradeoff probably no longer makes sense.

There are negative supply-side effects from providing unemployment insurance (UI) benefits. The best estimates I have seen suggest the current 9.5% unemployment rate is 0.5 – 1.0 percentage points higher than it would otherwise be because of previously-enacted expanded and extended UI benefits. I will start by using the bottom end of that range (0.5).

I use 5.0% to represent full employment. We are 4.5 percentage points above that. If we did not have expanded UI we would be 4.0 percentage points above full employment. That means for every 9 people out of work, one is being discouraged from taking a new job because of the expanded benefits (0.5 / 4.5). Said another way, eight people who would like a job but cannot find one are getting more generous UI benefits for each person who is getting those same benefits and choosing not to take a new job. We have to make a tradeoff between our desire to help those who want a job but cannot find one and those who would choose to stay unemployed while they have extra benefits.

The judgment call for policymakers: does an 8:1 ratio make a UI extension good policy? I say yes. If, however, the supply-side disincentive is a full percentage point, then we have a 3.5:1 ratio. That is a tougher call, but I would still say yes. Given the range of possible supply-side disincentives, I would recommend extending UI benefits when the unemployment rate is 9.5%.

I assume that most everyone would agree that at full employment it is foolish to provide more generous UI benefits. So somewhere between 5.0% and 9.5% there is a breakpoint at which the supply-side disincentive is not worth the compassion benefit of providing aid to others who want a job but cannot find one.

At a 7% rate our ratio is between 1:1 and 3:1. At an 8% rate it’s between 2:1 and 5:1. My breakpoint is around 8%. I would support a (paid for) UI extension as long as the rate is 8% or above. There is nothing magical about this judgment, and yours may differ.

This Recession is Not So Great

I'm ordinarily a huge Robert Samuelson fan, but this morning I've got to demur.  In this discussion of the current recession (known for some reason as The Great Recession), Mr. Samuelson spends a few paragraphs talking about the recession, and then toward the end, he says this:

  "Another theory -- more powerful, I think -- is that the Great Recession, though jarring to almost everyone, has been most disruptive and disillusioning to those who were previously the most protected. It punctured their cocoons so unexpectedly that they became more cautious and fearful, whereas those who even in good times faced job loss and income shifts (many blacks, the young and the poor) were less surprised. One legacy of the Great Recession is that insecurity and uncertainty have gone upscale. People feel more exposed. They tend to plan for the worst rather than hope for the best. Their reluctance to make major purchase commitments (a new car or home) validates their pessimism by retarding recovery." 

Reading the article, I come away with the sense that Samuelson has bought into "the Great Recession" hype in a big way.  I'm here to dispute that hype. Front and center for me is what Samuelson brings up in the paragraph above without really meaning to do--and that is, Americans are convinced this recession is "Great" because of how it makes us "feel" and how it makes us "plan", rather than what it does to us on an individual, everyday basis.  Looking through THAT lens, this recession doesn't stack up. 

Ninety six percent of mortgage holders are making their payments.  Ninety percent of those who wish to work (represented by those actually working or seeking work) are working.  One hundred percent of those who wish to buy a house or borrow money for any other reason will do so at historically low mortgage rates.  One hundred percent of those who purchase goods are doing so in historically low inflation.  The point here is that the while the "Great Recession" has been a terrible thing, its impact has been far less pervasive than the recession of the early 80's.  I've talked about this before, remember--the one with double digit unemployment, double digit interest rates and double digit inflation--ALL AT THE SAME TIME?

Put another way--anyone who had investments in equities--for retirement or otherwise--has gotten crushed in the past two years.  But if you weren't planning on turning to that money for living expenses, the loss--like the gains that preceded it--was on paper.  Psychologically damaging, but not financially debilitating.  Turning to the housing market--I think it is important once again to stress that the overwhelming majority of people who own houses are making their payments.  Something on the order of four percent aren't.  Again--even if you are "upside down"--you are STILL gaining the primary benefit of homeownership--shelter--as you ponder the paper value of your home.

This recession--unlike the one in the 80's--is remarkable not for how it ACTUALLY impacted the economy, but for how it makes Americans FEEL about the economy.  Confidence in the banking system was devastated.  A foreboding sense of the dread at mounting federal debt is pervasive.  While the recession of the 80's WAS actually worse than this by any rational measure of everyday impact, it did not raise the specter of systemic failure to the extent that this one does.  This recession is only "Great" in its capacity to make us THINK about subjects we previously did not have to consider. 

So my beef with Samuelson is one of degree.  Referring to this as "The Great Recession" does injustice to a clearly more devastating time in our history.  Consistent with our tendency to believe the times in which we live are "unique" and "exceptional", we call our recession "Great" as a way of explaining to future generations why it was that we were forced to save more and live within our means.  After all, doing so for any other reason just wouldn't be heroic enough. 

Uncertainty Holds Up Hiring

More on the increasingly deafening drumbeat that businesses aren't hiring because they just don't know what the next shoe to drop in their operating environment will be.  Some of my lib friends seem to think this is all much ado about nothing, and some seem to think that business "had it coming to them".  Others think there's nothing even remotely anti-business about Mr. Obama's policies. 

Of course, none of these people actually work in business--but that's another story.

Spending Our Way To Solvency

President Obama continues to beat the Keynesian drum of spending our way to solvency, with Paul Krugman no doubt cheering from the sidelines.  At the G-2- conference this weekend, The One apparently hectored the Europeans to spend more while they seem more interested in reining in spending.  Apparently our current economic torpor is the result of insufficient spending, at least according to the President and his buddy Dr. Krugman.  Tis a sad day indeed when one looks to the other side of the Atlantic for wise and restrained fiscal discipline. 

The Role Of The Credit Raters In The Meltdown

Very interesting story here about the role of corporate culture at the credit rating agencies, one that drove analysts to continue to provide higher investment ratings on vehicles and products then their analysis would support--because of the fear of lost profits from those whose products were being rated.

We had a very well-informed caller on the show Wednesday night speak at length of the role of the credit rating agencies in the melt-down, and this article seems to back some of that up.

When I think of financial industry reform, I always talk about reforms that make the market "more free". In this case, the fact that these ratings agencies were very likely rating these vehicles improperly to support their own bottom lines--favored one side of a market transaction over the other. This is not a free market. Here is where government could have a salutary role in regulating the activities of the ratings agencies.

David Broder Discovers National Debt; World Awaits Similar Discovery of Government Spending

David Broder's addled mind continues to punch out 750 words a week for the WaPost, and this time he's treated us once again to the old standard of the left--that we need to raise taxes to deal with our accumulating debt--never mind that policy choices have created (and exacerbated) this debt.

This is how the left would have it; create entitlements (even when national debt is already out of control) then point back at the fiscal "crisis" to justify raising taxes.

Little or no talk of cutting spending, in this article or anywhere else.

No Representation Without Taxation

Via Instapundit--I love this blog post, as it hits two of my favorite pet peeves: the alarming number of people who pay no income taxes in this country, and middle class entitlements. It lays out in common sense language the twin cancers that are sapping this country of its vitality. Be afraid, America. Be very afraid.

Bernanke Warns On Deficits

Fed Chair Ben Bernanke is sounding the alarum about the growing menace of budget deficits (and long term debt) to the US economy.

I'm glad he's doing it. Some think the Fed Chair should stay out of "political matters" (like raising taxes, cutting spending, etc)--but the more I hear Alan Greenspan pilloried for his tenure, the more I feel that the Fed Chair has become the uber-meister of the US economy as a whole--and as such, he should sound off when he feels we're headed in a bad direction.

Keith Hennessey on Subsidizing "Underwater" Mortgage Holders

Longtime readers of this blog will note that there are few subjects that get my dander up more quickly than the suggestion that "underwater" mortgage holders should in some way be "aided" by government. Underwater mortgages are NO different than diminished 401K's or any other investment. Investing means risk, and that risk sometimes means that one loses money. In the case of the mortgage however, one STILL retains the "shelter" value of the asset, and by this, I mean the PHYSICAL shelter value--even in the absence of monetary value equal to that of the investment.

The incomparable Keith Hennessey weighs in on this issue with eloquence and precision I can only aspire to, as the Obama Administration implements yet another plan to "keep people in their homes".

His differentiation between fixed rate underwater mortgages and ARM underwater mortgages is a useful one from a policy perspective. If you're payment isn't changing (fixed), you have absolutely nothing to complain about if the value of your house declines (well, nothing more than any other investor who has suffered losses). If you have an ARM--well then--in the way of POLICY--there is more room for government assistance. Ideologically, I still think it stinks.

I once again make the one statement in this blog that may come back someday to kill my political career--and that is, the home mortgage interest deduction should be eliminated. Period. Kaput. It advantages one class of investment over others, it encourages people to buy more house than they can afford, and it skews investment portfolios--which should be diversified and balanced--to too highly weight real estate. The arguments about home-ownership being somehow related to better civic life are overdone, as study after study in Europe (where home-ownership is less) have shown.

Why No Job Growth? Why is The Dow Wheezing?

Tigerhawk and Glenn Reynolds at Instapundit team up in this post to give a pretty fair overview. Businesses aren't going to hire if they're waiting for the next shoe to drop.

Gorbachev In 2012

Former Soviet leader Mikhail Gorbachev came out swinging against the policies of the current Russian regime, and hinted yesterday that he may return to politics in some fashion. He urged Vladimir Putin to restructure the economy and cut government spending. "We have paternalistic expectations of government support," he told a conference gathered at one of his charitable organizations.

Hmm...reduce reliance on big government; restructure the economy, presumably away from central planning toward market-based reform and ensuring political freedoms?

Sounds downright conservative.

Truly, the world has been turned on its head

Pac Sand, Baggers

President of the Pacific Obama, during his meetings with ASEAN leaders, apparently announced that he was bringing Obamachange to the world economy as well:

Mr. Obama, in a speech Sunday, took his appeal for a new world economic order to the leaders of Asia that must help make it happen. He said the United States would strive to consume less, save more and restructure its economy around trade and exports. But he appealed to Asian nations to make their own economies more dependent on domestic consumption than U.S. profligacy.

Like POTPAC, apparently, I am not much of an economist, but I wonder how does T.O. intend to deliver on this commitment to his PacPals? Don't get me wrong, curbing our consumption of imports and having more personal savings both appeal to me, but in this age of government-intervention in my personal decisions (those personal decisions where my choice does not involve the death of another human) I am deeply suspicious of the mechanisms he has in mind for his continental subjects east of The Pac.

Doesn't "strive to consume less" mean the same thing as "purchase fewer goods and resources"? If so, does this mean POTPAC is intending to enact policies to cut back US manufacturing of products for which consumption of resources is generally considered a necessity? At the consumption of goods level, does that mean that POTPAC has plans for our remaining personal discretionary earnings with which we tend to make such purchases?

And as for his "appeal" to Asian nations, isn't "make your own economies more dependent on your own domestic consumption than [continued] US profligacy pretty much the bellringer that he has little faith in American economic recovery? Or perhaps that he has great faith that his vision for a socialist America will in fact be realized and that his PacPals better get hot on reconfiguring their economies because POTPAC is taking America back to the Good Ol' Days: