Do Unemployment Benefits Stimulate the Economy?

With the appointment of an interim Senator in West Virginia, Democrats in Washington are pushing through an extension on unemployment benefits. Under current law, benefits run out after 99 weeks (up from a previous record high of 65 weeks in 1975).

There's valid argument that a compassionate society with a dynamic economy should provide unemployment benefits, and a legitimate debate regarding how much and how long. But recently, some have gone beyond this and argued not only that these benefits are necessary, but that they actually stimulate the economy.

Most notably, White House Economist Lawrence Summers claims that not extending the unemployment benefit beyond almost two years would cost the U.S. economy $10 billion and 100,000 jobs.

Some center-left economists have calculated that Michigan will miss out on $205.6 million in "economic stimulus." And columnist Jackie Headapohl writes on Mlive.com that, "Unemployment insurance puts money in the pockets of the families most likely to spend the money — which in turn expands the economy and creates jobs."

So is this accurate? Does government money in the form of unemployment benefits expand the economy?

Of course not. If it were true, Spain and Greece would be robust economic success stories, since they have virtually unlimited welfare. In fact, both countries suffer unemployment rates much higher than the United States, as have all the European social welfare states, not just in the current hard times, but consistently over the past several decades.

If the proponents of extending unemployment benefits are right, then why not just make welfare unlimited? Given the "multiplier" effects they claim for government spending — that it generates more new economic activity than paying for it costs the economy — wouldn't unlimited welfare expand the economy even more?

Believers in Keynesian economics always fall back on that supposed "multiplier" effect to defend more government spending. It was used to sell the $787 billion 2009 stimulus, the $152 billion 2008 stimulus, the 2007 stimulus, and all the other stimuli here and around the world. In 2009, White House economists projected that the unemployment rate would peak at 9 percent without the new spending, but stay below 8 percent with it. Of course no such thing happened; unemployment broke 10 percent, and today stubbornly stagnates around 9.5 percent nationally.

Many learned tomes have been written about why Keynesian spending programs don't grow the economy, but perhaps the wisest modern economist of them all, the late Milton Friedman, summed it up in terms so simple even a politician should understand: "There ain't no such thing as a free lunch." That is, government can't give a dime to one person that it doesn't first take from someone else.

Temporary unemployment benefits are an expense our society accepts out of compassion for those with the misfortune to lose their job. To avoid the benefits from becoming a disincentive to work they have a limited duration. Americans view with healthy skepticism claims by tax-and-spend politicians that the benefits are anything other than an expense. That skepticism is more than justified.

If government robbing Peter to pay Paul was all that was needed for economic growth, socialism would be a worldwide success story instead of a lingering migraine constrained to third-world economies.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.